Whether when AE pays higher rate of interest on delayed payment as compared to third parties, no fault can be found with AO for initiating reassessment for transfer of profits to assessee eligible for Sec 80IA benefits - YES: HC

THE issue before the Bench is - Whether when the AE pays higher rate of interest on delayed payment as compared to third parties, no fault can be found with AO for initiating reassessment for transfer of profits to assessee eligible for Sec 80IA benefits. And the verdict goes against the assessee.

Facts of the case

Assessee-petitioner is a company registered under the Companies Act. For the AY 1999-2000, the assessee filed its return

of income declaring total income of Rs.3,63,23,970/- u/s 115JA. Such return was taken in for scrutiny by the AO u/s 143(3) and the income was recomputed at Rs.5,10,02,030. During the scrutiny proceedings the AO found that the assessee had sold certain goods to its sister concern Aditya Medisales during the year under consideration. On delayed payments of such goods, Aditya Medisales paid interest at the rate of 24% which was much higher than the prevailing market rate of interest which varied between 15% to 18%. By adopting such modality, the assessee had reduced the taxable profit of Aditya Medisales and at the same time increased the profit of Silvasa unit of the assessee company which was eligible for deduction u/s 80-IA of the Act in clear violation of section 80-IA. These facts were not clear from the working out of deductions u/s 80IA along with the return of income. According to the AO, case of the assessee would be covered u/s 80IA(10). Therefore, interest payable to the assessee should have been restricted to 15% to 18% which would reduced the profit of the said unit and resultantly deduction u/s 80IA of the Act would also be reduced. The AO had raised in total four grounds. However, out of those four grounds three grounds were held invalid by this Court in assessee's own case vide order dated 31st July 2012, and hence the AO withdrew the same. The sole ground that survived was regarding the charging higher rate of interest to the sister concern of the petitioner.

The AR contended that the notice for reopening was without jurisdiction. He submitted that the assessee had disclosed the interest amount charged during the assessment and reopening the same was merely on the basis of change in opinion.

In the counter argument, the DR contended that assessee did give the total figure of interest received. However, from such figures, it was not possible to ascertain these vital facts. The assessee had submitted voluminous details along with the return of income which were not at all required to be filed only to confuse and complicate the matter pertaining to the assessment and thus the AO was of the opinion that the income had escaped assessment.

Having heard the parties, the High Court held that,

++ under the circumstances, the sole surviving issue for our consideration is whether on the basis of ground No.2 of the reasons recorded by the Assessing Officer, reopening would be permissible in the present case. In this respect also, we may notice that this very ground came up for consideration in Special Civil Application No.12468 of 2004 wherein we have upheld the right of the Assessing Officer to reopen the assessment making following observations that under the circumstances, if it is found that the assessee had charged higher rate of interest from the sister concern and thereby, arranged its business in such a way that the eligible profit for deduction under section 80IA of the Act was exaggerated, it was within the power of the Assessing Officer while computing the deduction to take amount of profit as may be reasonably deemed to have derived from such dealing. In exercise of such powers, therefore, when the Assessing Officer finds that there is exaggeration of income by an assessee, which is eligible for deduction 80IA of the Act dealing with closely associated entity, he would make necessary adjustments in this regard. Thus it was held that it cannot be said that belief of the Assessing Officer that income chargeable to tax had escaped assessment is baseless;

++ the issue being common, we see no reason to take a different view. In fact, we may notice that the above decision was rendered by us in a case where notice for reopening of the assessment was issued beyond the period of four years from the end of the relevant assessment year whereas in the present case, such notice is issued within four years. In that view of the matter, the contention of the counsel for the petitioner that full facts were available on record before the Assessing Officer when the assessment was previously framed after scrutiny would be of no avail. In the result, the petition fails and is dismissed.