IMPORTANT POINT
The key legal principle established in the judgment is that the notice for reopening the assessment under Section 148 of the Income-Tax Act, 1961 must be based on fresh tangible material, and reopening based on audit party objections is invalid.

JUDGMENT :

Bhargav D. Karia, J.

1. Rule returnable forthwith.

2. Ms.Maithili Mehta, learned Senior Standing Counsel waives service of notice of Rule on behalf of respondent.

3. Having regard to the controversy in narrow compass, with the consent of learned advocates for the parties, the matter is taken up for hearing.

4. By this petition under Article 226 of the Constitution of India, the petitioner has challenged the notice issued under Section 148 of the Income-Tax Act, 1961 (for short ‘the Act’) dated 21.3.2021 for reopening of the Assessment Year 2017- 18.

5. The petitioner, who is an importer and refiners of edible oil in India, filed original return of income for Assessment Year 2017-18 on 22.11.2017 which was revised on 26.11.2018, declaring total income of Rs.54,94,84,050/- under the normal provisions and book profit of Rs.345,20,74,045/- under MAT provisions of the Act.

5.1 The case of the petitioner was selected for scrutiny and detailed notice under Section 142(1) of the Act dated 5.7.2019 was issued, requiring the petitioner to furnish various details with respect to break-up of ‘any other amount allowable as deduction’ claimed in Schedule BP of return, wherein notional guarantee commission of Rs.99,72,603/- was claimed by the petitioner.

5.2 The petitioner by reply dated 14.11.2019 submitted the requisite details. Thereafter, the assessment order under Section 143(3) of the Act was passed on 2.12.2019 assessing total income of Rs.55,42,43,719/- under the normal provisions and book profit of Rs.345,68,33,714/-.

5.3 The respondent thereafter issued the notice under Section 148 of the Act on 21.3.2021 for Assessment Year 2017-18. The petitioner, in response to the notice, filed return of income and requested for the copy of the reasons recorded for reopening the assessment.

5.4 The respondent – Assessing Officer provided the reasons for reopening on 12.5.2021, which read as under :

“2. Brief details of Information collected/received by the AO: On perusal of the Assessment records for the year under consideration, it is found that in Profit and Loss account, at Note No.29 "Other Income" of Annual Report for F.Y. 2016-17 relevant to the Assessment Year 2017-18, the assessee has received guarantee commission of Rs.9.97 Mn. The assessee company has reduced an amount of Rs.99,72,603/- from its total income on account of corporate guarantee fees which is in respect of two of its subsidiaries companies claiming it to be a notional income. However, it is seen that while computing the book profit the assessee has disallowed the same and increased the book profit. On the one hand the guarantee fees to the extent of 99.73 lakhs after deductions of Rs. 27,000/- which could not be ascertained from the records and on the other hand it is noticed that at note no. 5 of the balance sheet the investments in share capital of the two subsidiary companies namely KOG Food Products (India) Pvt. Ltd. and KTV Health Food Pvt. Ltd. has correspondingly been increased by Rs. 1 cr. The assessee has credited this guarantee commission in its income from other sources which is at the rate of 1% as mentioned in note 5 to its balance sheet. From the above treatment of the guarantee that commission when the same is credited in the profit and loss account and correspondingly share capital has been Increased in these two subsidiary companies it cannot be said to be notional income as claimed by the assessee and as reduced from its total income. As per para 6 of ICDS-IV, revenue from service transactions was to be recognized in same manner as in para 20 of Ind. As. Further the investment is increased in a notional manner but by actually recognizing investment on consideration of actual service provided.

The reduction of guarantee fees of Rs.99,72,603/- is not allowable from the computation of total income under normal provisions. The claim of wrong deduction has resulted in escaped assessment by an amount of Rs.99,72,603/-.

3. Analysis of information collected/receiv