2014 (3) TMI 1055 - AT - Income Tax

Reopening of assessment - Held that - There was no failure on the part of the assessee in furnishing all the necessary information and material and in view of proviso to s. 147 of IT Act, the reassessment proceedings cannot be initiated by issue of notice under s. 148 of IT Act. The reopening under s. 147 of the Act by the AO on the basis of change of opinion was not justified. The revision of the assessment order cannot be permitted by the AO himself under the guise of reassessment. - Decided in favour of assessee Addition made under s. 40A(3) - expenses was not found to be covered under r. 6DD of IT Rules - Held that - The nature and circumstances of the business of the assessee are same as they were in the asst. yr. 2006-07 and asst. yr. 2007-08. Therefore the findings of Tribunal are applicable for the asst. yr. 2008-09 also. Therefore, in view of the above decision of Tribunal in the case of assessee itself, we hold that the learned CIT(A) was not justified in confirming the addition of ₹ 19,05,000 made by the AO by disallowing the cash payment under s. 40A(3) of IT Act. Accordingly, the addition of ₹ 19,05,000 is deleted.- Decided in favour of assessee Disallowance of provision for development expenses - provision claimed by the assessee as future liability of development expenses against the sales of the plot booked by it in these years - assessee is a colonizer who purchases agricultural land from the farmers and get it converted from JDA - Held that - The main problem which the assessee is facing that most of the lands were in joint names. Some of the original Khatedar sold the land to the assessee but some of them have not sold to the assessee. Since the Khasaras are in joint names therefore without Takasana it was not possible to carry out development work on the land, which the assessee sold. This is also a reason that the assessee invested huge amount in gold bullion to keep the money in reserve separately for the purpose of development work. However, liability towards development expenses to be incurred in future on the plots sold did not extinguish merely because the assessee has incurred small part of expenses in next few years. The AO held that the funds of provision made for development of land are being used for expansion of the business. The assessee used the funds for expansion of business as the development work could not be carried out at full swing due to certain reasons. The surplus funds were not used otherwise than for business purpose. The above explanation cannot be rejected merely on surmises and conjectures rather it appears to be bona fide.The learned AO was not justified in making the additions by disallowing the provision for development expenses claimed by the assessee as future liability of development expenses against the sales of the plot booked by it in these years. - Decided in favour of assessee

Issues Involved:
1. Validity of reassessment proceedings under Section 147 of the Income Tax Act.
2. Allowability of provision for development expenses as an ascertained liability.
3. Disallowance under Section 40A(3) for cash payments exceeding Rs. 20,000.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 147:

Proviso to Section 147 is Applicable for Asst. Yr. 2005-06:
The assessee argued that the reassessment proceedings initiated after four years from the end of the relevant assessment year were invalid as there was no failure on their part to disclose fully and truly all material facts necessary for the assessment. The Tribunal found that the assessee had disclosed all the necessary details in the audit report and balance sheet, and the original assessment was completed after detailed examination. The Tribunal held that the reassessment proceedings were invalid as they were based on a change of opinion and not on any failure to disclose material facts by the assessee.

Reopening is Not Based on Valid Reasons:
The Tribunal noted that the reasons recorded for reopening the assessment were erroneous and bad in law. The AO must have valid "reasons to believe" that income had escaped assessment, which was not the case here. The reasons recorded by the AO did not consider the settled law that provisions for future liabilities are allowable under Section 37(1) of the IT Act. The Tribunal cited various judicial precedents to support this view.

Change of Opinion:
The Tribunal held that the reassessment proceedings were initiated merely on a change of opinion, which is not permissible under the law. The AO had already examined the details during the original assessment, and the reassessment was an attempt to review the earlier decision, which is not allowed.

2. Allowability of Provision for Development Expenses as an Ascertained Liability:

The Tribunal upheld the CIT(A)'s decision that the provision for development expenses was an ascertained liability. The assessee, a colonizer, was required to carry out internal development work as per the norms of the Jaipur Development Authority (JDA). The cost of these development activities was included in the sale price of the plots, and the provision for these expenses was made following the mercantile system of accounting. The Tribunal noted that the liability for development expenses accrued as soon as the plots were sold, even though the actual expenses would be incurred in the future. The Tribunal cited the Supreme Court's decision in Bharat Earth Movers vs. CIT, which held that a business liability that has arisen in the accounting year should be allowed as a deduction, even if it is to be discharged at a future date.

3. Disallowance under Section 40A(3) for Cash Payments Exceeding Rs. 20,000:

The Tribunal deleted the addition made under Section 40A(3) for cash payments exceeding Rs. 20,000. The assessee had made these payments to farmers for purchasing agricultural land, and the transactions were genuine and supported by documentary evidence. The Tribunal noted that the payments were made in villages where banking facilities were not available, or after banking hours, which constituted exceptional circumstances under Rule 6DD of the IT Rules. The Tribunal referred to its earlier decision in the assessee's case for the assessment years 2006-07 and 2007-08, where similar disallowances were deleted.

Conclusion:

The Tribunal quashed the reassessment proceedings for the assessment years 2005-06, 2007-08, and 2008-09, holding them to be invalid. The Tribunal also upheld the CIT(A)'s decision to delete the additions made by the AO on account of provision for development expenses, considering them as ascertained liabilities. Additionally, the Tribunal deleted the disallowance under Section 40A(3) for cash payments exceeding Rs. 20,000, citing exceptional circumstances and the genuineness of the transactions.

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