By TIOL News Service

AHMEDABAD, MAY 11, 2018: THE ISSUE IS - Whether the HC can give finality to an issue even if, the same was never gone into at the time of original scrutiny assessment before the AO. NO IS THE ANSWER.

Facts of the case:

The assessee firm, engaged in construction related activities, had returned income for the relevant AY. The assessee's return was taken in scrutiny by the AO, who passed an assessment order u/s 143(3). However, later, the AO noted that excess deduction was claimed and allowed to the assessee u/s 80IB(10) as net profit of the undertaking was calculated without debiting the payment of interest on partner's capital. As per the partnership deed, interest was payable to the partners at the maximum rate of 12% on the investment by them in the firm. Accordingly, the interest on partner's capital works out to Rs.18,93,189/@ 12% of the closing partner's capital balance. The AO believed that by not debiting on partners capital fund, the assessee had incorrectly enhanced the claim of deduction u/s 80IB. Further, as per the partnership deed, the remuneration will be paid in the maximum limit u/s 40(b)(v). Therefore, the AO issued reopening notice. However, such notice was objected which was subsequently rejected by the AO.

High Court held that,

++ the disputed notice has been issued within a period of four years from the end of relevant AY. Further, it is not even the case of the assessee that during the original assessment proceedings, the issues raised by the AO had come up for scrutiny. In other words, the assessee has not argued that the reopening of the assessment is based on change of opinion. The assessee's main ground is that the AO has proceeded on amended partnership deed ignoring the material amendments;

++ in this context, we may recall, in the reasons recorded, the AO had objections to the assessee's claim of deduction u/s 80IB(10). According to him, such deduction was inflated on two counts, i.e. (i) the partnership firm was not paying interest on the partners' capital invested with the firm and (ii) it was not paying remuneration to the partners. In this context, the AO referred to two clauses of the partnership deed. One of such clauses provided that whatever capital is invested in the firm, interest will be payable at the maximum rate prescribed under the Act and the other clause provided that the working partners of the partnership firm shall be paid remuneration for the special work and such remuneration will be paid within the maximum limit under the Act. It is not in dispute that the assessee did not pay interest on the outstanding capital invested by the partners in the partnership firm and that it paid remuneration to only one out of the several partners;

++ we are concerned with two amendments in the partnership deed dated 17.04.2006 and 15.08.2007 respectively. The amendments were not part of the original assessment proceedings. The AO was, therefore, guided by the original unamended partnership deed while recording the reasons. These changes were brought to his notice by the assessee through objections raised to the reopening notice. The AO discarded the objections based on the changes in the said Deed on two grounds; firstly, the AO was of the opinion that the assessee, being a registered partnership firm and the original partnership deed, having been duly registered, any changes by way of amendment are also required to be registered under the Partnership Act, 1932. The second reason for rejection of the objections was that such changes appear to be an afterthought and also being unregistered, the authenticity being questionable;

++ in the present case, we are not inclined to conclude this issue and give finality to the issue. This is so because, even if the requirement of compulsory registration of the amendments is ignored, the question of the changes being genuine, authentic or contemporaneous, still survives, which is an issue which was never gone into at the time of original scrutiny assessment. In fact, admittedly, the amendment in the partnership deed did not form the original assessment proceedings at all. When the reopening notice has been issued on the basis of reasons recorded on the strength of the materials on record, we would not go behind the sufficiency of such reasons when we find that there was a live link between the material at the hands of the AO and his formation of belief that income chargeable to tax has escaped assessment. Therefore, while keeping the question of requirement of compulsory registration of the amendments in the partnership deed and the authenticity of the amendments in the partnership deeds relied upon by the assessee, subsequent to the issuance of the notice of reopening and recording of reasons open, the petition is dismissed.

(See 2018-TIOL-884-HC-AHM-IT)