2015 (9) TMI 1427 - AT - Income Tax

Reopening of assessment - disallowance of service charges payable on procurement of gunny bags - Held that - Reopening on the basis of audit objection is as per law in the given facts and circumstances of the case and the learned CIT (Appeals) has very aptly analyzed the validity of notice under section 148 of the Act and we do not find any infirmity in the findings recorded by the learned CIT (Appeals). Therefore we uphold the order of the learned CIT (Appeals) on this account. On the merits of the case bare submissions were made and no document or evidence to support the claim that the liability on account of purchase of gunny bags has actually crystallized in the year under consideration was brought on record. Therefore we are in agreement with the findings of the learned CIT (Appeals) that the said expenses are not allowable in the year under consideration. As regards the alternative contention of the learned counsel for the assessee that the expenses may be allowed in the year in which they arisen we see that the learned CIT (Appeals) had directed the Assessing Officer to verify this aspect and give the assessee due relief - Decided against assessee

Summary

Issues Involved:
1. Validity of reopening of assessment under section 147 of the Income Tax Act, 1961.
2. Disallowance of prior period expenses under section 37(1) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment under Section 147 of the Act:

The primary issue raised by the assessee was the legality of the notice issued under section 148 of the Income Tax Act, 1961, which was based on objections raised by the Audit Party. The assessee argued that reopening based solely on audit objections is invalid, citing the judgments of the Hon'ble Supreme Court in the cases of CIT Vs. Lucas T.V.S. Ltd. and Indian & Eastern Newspaper Society Vs. CIT. The assessee contended that the audit objection pertained to the interpretation of law, which cannot be a valid ground for reopening the assessment.

The Department, however, relied on the judgments of the Hon'ble Supreme Court in CIT Vs. P.V.S. Beedies (P) Ltd. and ACIT Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., arguing that reopening based on audit objections is valid if it points out an error.

The Tribunal observed that the audit objection in this case was related to the factual position that the assessee claimed prior period expenses in the current year, which is not allowable as per law. This was not an interpretation of law but a factual error. The Tribunal upheld the CIT (Appeals)'s finding that reopening based on such an audit objection is valid, referencing the judgment in P.V.S. Beedies Pvt. Ltd., which allows reopening on the basis of an error pointed out by the Audit Party. Thus, the Tribunal found no infirmity in the reopening of the assessment under section 147 of the Act.

2. Disallowance of Prior Period Expenses under Section 37(1) of the Act:

On the merits of the case, the assessee argued that the service charges for the purchase of gunny bags, although pertaining to prior periods, were accepted and crystallized in the year under consideration. The assessee requested that these expenses be allowed in the year they were incurred or alternatively, in the year they arose.

The CIT (Appeals) disallowed the expenses, noting that the assessee failed to provide evidence supporting the claim that the liability crystallized in the current year, apart from the ledger account. The CIT (Appeals) directed the Assessing Officer to verify and allow any expenses incurred during the year under consideration.

The Tribunal agreed with the CIT (Appeals)'s findings, emphasizing that no additional evidence was provided by the assessee to substantiate the claim that the liability arose in the current year. Consequently, the Tribunal upheld the disallowance of the prior period expenses in the year under consideration and found no infirmity in the order of the CIT (Appeals).

Conclusion:

The appeal of the assessee was dismissed. The Tribunal upheld the validity of the reopening of the assessment under section 147 of the Act based on audit objections pointing out factual errors. Additionally, the disallowance of prior period expenses under section 37(1) of the Act was maintained due to the lack of evidence proving that the liability crystallized in the year under consideration.