Section 5, read with sections 28(v) and 145, of the Income-tax Act, 1961

Court :
IN THE ITAT NAGPUR BENCH

Brief :
Section 5, read with sections 28(v) and 145, of the Income-tax Act, 1961 - Income - Accrual of - Assessment years 1998-99 to 2002-03 - Whether mere withdrawal by partners cannot be considered to be a method of accounting and amount, which is made unconditionally available by firm to partners by way of credit to their capital accounts, can be considered as received by partners even though such partners are following cash system of accounting - Held, yes - Whether therefore, interest and remuneration credited to accounts of partners by firm would be assessable to tax as income received by partners and partners cannot offer same to tax only to extent of amount withdrawn by them from such firm - Held, yes Section 147 of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts - Assessment years 1998-99 to 2002-03 - Whether as per Explanation 1 to section 147, production, before Assessing Officer of account books or other evidence from which material evidence could, with due diligence, have been discovered by Assessing Officer, will not necessarily amount to discover within meaning of proviso to section 147 - Held, yes - Whether, therefore, where after completing assessment under section 143(1)(a), it came to knowledge of Assessing Officer that though firm was claiming deduction by way of interest payable to partners, such sum was not offered for taxation by partners, Assessing Officer had reason to believe that income chargeable to tax had escaped assessment and, therefore, he was justified in reopening assessment of assessee-partners - Held, yes Facts The assessees were partners in a firm having equal share therein. Original assessments were completed under section 143(1)(a). Later on, the Assessing Officer found that the firm was crediting the accounts of partners by way of interest and remuneration to the extent due to them based on mercantile system of accounting. However, when it came to the hands of partners, the partners were offering the same only to the extent of amount withdrawn from the firm. It was the contention of the partners that since they were following cash system of accounting, such interest income from firm was offered to taxation in the year of receipt and not in the year of credit to their accounts. The Assessing Officer found that since the firm was crediting accounts of partners to the extent of amount due, which was accumulated over years and again interest was paid on such capital account including interest of earlier years credited, it amounted to payment and, hence, the partners should have offered the income by way of interest credited to their account. He, accordingly, issued notice under section 148 to reassess income of partners holding that same was not correctly disclosed. Thereafter, the Assessing Officer passed the reassessment order by bringing to tax the interest income credited to the accounts of partners by the firm as income received by the partners. On appeal, the Commissioner (Appeals) set aside the reassessment order. On revenue’s appeal, the assessees filed cross objections challenging reopening of assessment under section 147. It was the contention of the assessees that when the original return was filed, there was full and true disclosure and the fact that the assessees were following cash system of accounting in respect of interest and remuneration from the firm was also specifically mentioned by way of note; and that in absence of any fresh material coming to the knowledge of Assessing Officer, he was not justified in reopening the completed assessment.

Citation :
Assistant Commissioner of Income-tax, Circle-6, Nagpur v. Vijay Kumar Patni