Reassessment under Section 148 for Partner Interest/Remuneration Clauses Held Invalid: Gujarat High Court in My Home Developers Vs ACIT

1. Background and Scope of the Decision

The Gujarat High Court, in My Home Developers Vs ACIT (Gujarat High Court), addressed a cluster of writ petitions concerning reassessment notices issued under Section 148 of the Income Tax Act 1961. These notices related to Assessment Years (AYs) 2011-12, 2012-13 and 2013-14 and were issued to a partnership firm, My Home Developers, engaged in the development of housing projects.

The core allegation of the Revenue was that the assessee had availed excessive deduction under Section 80IB(10) on the premise that the firm had not debited interest on partners’ capital and remuneration to partners as per the partnership deed, thereby allegedly inflating its eligible profit and causing income to escape assessment.

The High Court examined:

  • Whether the clauses in the partnership deeds regarding interest on partners’ capital and remuneration were mandatory in nature, and
  • Whether the belief of escapement of income, founded on those clauses, could lawfully sustain reopening of completed assessments under Section 148.

The Court ultimately quashed the reassessment notices and all consequential proceedings.

2. Chronology of Events and Relevant Partnership Deeds

2.1 Constitution and Deed History

  • My Home Developers was constituted as a partnership firm with effect from 15.06.2007.

  • A partnership deed dated 27.06.2007 was executed. This deed:

    • Contained a clause permitting payment of interest on partners’ capital at a prescribed rate,
    • Explicitly stated that no remuneration would, at that stage, be paid to any partner, though the partners retained the right to alter this by mutual consent.

  • Due to a change in constitution, a fresh partnership deed was drawn on 01.04.2008. This deed similarly provided for:

    • Payment of interest on partners’ capital,
    • No remuneration being payable to partners at that time.

  • Subsequently, with effect from 01.04.2009, the partnership deed was amended. Under this amendment, the partners mutually agreed that:

    • No interest would be paid to partners on the balances standing in their capital or current accounts.

2.2 Earlier Scrutiny Assessment for AY 2010-11

For AY 2010-11:

  • The assessee’s case was taken up for scrutiny under Section 143.
  • An order dated 20.03.2013 was passed, wherein income of Rs.76,25,000/- disclosed during survey was treated as “income from other sources” instead of “business income”, and deduction under Section 80IB(10) on this sum was denied.
  • The Commissioner of Income Tax (Appeals) dismissed the assessee’s appeal on 28.08.2014.
  • On further appeal, the Income Tax Appellate Tribunal, by order dated 07.08.2015 in ITA No. 2966/Ahd/2014, held that the amount of Rs.76,25,000/- constituted business income and that the assessee was eligible for deduction under Section 80IB(10) on this amount.

Crucially, for AY 2010-11:

  • The assessee had claimed deduction under Section 80IB(10) without debiting any interest on partners’ capital or any partner’s remuneration.
  • The Revenue did not disallow the deduction on the ground of non-payment of interest or remuneration.

This past conduct formed an important plank of the assessee’s plea of consistency.

3. Impugned Reopening Notices for AYs 2011-12, 2012-13, 2013-14

The Assessing Officer issued notices dated 26.03.2018 under Section 148 for:

  • AY 2011-12 (SCA No. 20821/2018),
  • AY 2012-13 (SCA No. 20850/2018), and
  • AY 2013-14 (SCA No. 20853/2018).

In each case, the assessee filed a return in response and requested the recorded reasons, which were supplied.

3.1 Reasons Recorded – Common Premise

Across the three years, the essence of the recorded reasons was:

  • The Assessing Officer referred to the partnership deed (described as executed on 23.01.2008) and specifically to clauses 6 and 7, which:

    • Provided for interest at 12% on partners’ capital, and
    • Provided for payment of remuneration to working partners in accordance with Section 40(b) of the Act.

  • On this basis, the Assessing Officer assumed that:

    • The firm ought to have provided and paid interest on partners’ capital; and
    • The firm ought to have paid remuneration to partners for the entire relevant year.

  • Since the assessee had claimed deduction under Section 80IB(10) without making such debit entries, the Assessing Officer concluded that:

    • The assessee had claimed “excess” deduction under Section 80IB(10),
    • There was underassessment corresponding to the amount of deduction claimed,
    • Income had therefore escaped assessment due to failure on the part of the assessee to fully and truly disclose all material facts.

The quantified escapement in the reasons was:

  • AY 2011-12: Rs.7,60,385/-
  • AY 2012-13: Rs.15,78,260/-
  • AY 2013-14: Rs.25,98,219/-