2013 (8) TMI 411 - AT - Income Tax

Initiation of re-assessment proceedings u/s 147 of the Income Tax Act - reason to believe or reason to suspect - The assessee filed return of income declaring total income of Rs.11,35,776/- which was accepted by the AO while computing income of the assessee Held that - The profit and loss account and balance sheet are filed in the paper book of these concerns to show that the assessee did not deal in real estate and was also not colonizer in assessment year under appeal - Nature of business of these concerns held by the assessee would also support the submissions of the assessee that in the year under consideration, the assessee was not colonizer and dealer in real estate - The AO had not examined this information before recording his satisfaction of escaped income and initiated the re-assessment proceedings. The AO had acted only on the basis of suspicion that the assessee was a colonizer and dealer in real estate. The AO was having no material or evidence with him to support his belief that the assessee acted as colonizer or dealer in real estate in the assessment year under appeal. The reasons recorded by the AO for reopening of the assessment are factually incorrect and non-existent. Section 40A(3) applies in the case of expenditure claimed by the assessee while computing business income, but in this case, the assessee did not claim any expenditure in the profit and loss account of all the concerns held by him - The AO had to act on the basis of reason to believe and not on reason to suspect - The AO had failed to incorporate any material for his satisfaction for re- opening of assessment. There was no foundation to his reasons to believe that there was escapement of income in the assessment year under appeal. Therefore, the issuance of notice u/s. 148 of the IT Act for re-assessment proceedings was not valid Appeal allowed Decided in favor of Assessee.

Issues Involved:
1. Initiation of reassessment proceedings under Section 147 of the Income Tax Act.
2. Addition of Rs. 6,82,757/- under Section 40A(3) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Initiation of Reassessment Proceedings under Section 147 of the IT Act:

The appeal challenges the initiation of reassessment proceedings under Section 147 of the Income Tax Act. A survey under Section 133A was conducted on the business premises of the assessee, and certain papers were impounded. The Assessing Officer (AO) formed an opinion based on these papers that the assessee had purchased lands in cash during the financial year 2001-02, violating Section 40A(3) of the IT Act. Consequently, the AO initiated reassessment proceedings and made an addition of Rs. 6,82,757/-.

The assessee contended that the AO did not make efforts to determine whether the land purchases were claimed as expenditure to invoke Section 40A(3). The lands were initially purchased for constructing a Mall Complex, held as an investment, and later converted into stock in trade in the subsequent year. The assessee argued that the land was not purchased as stock in trade and no expenditure was claimed, making Section 40A(3) inapplicable. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the initiation of proceedings, believing that income chargeable to tax had escaped assessment due to the violation of Section 40A(3).

The Tribunal considered the rival submissions and the material available on record. The Tribunal noted that for the AO to initiate reassessment under Section 147, there must be "reason to believe" that income chargeable to tax has escaped assessment. The Tribunal referred to several judicial precedents, emphasizing that the belief must be based on reasonable grounds and not on mere suspicion. The Tribunal found that the AO's reasons for reopening the assessment were factually incorrect and without basis. The AO had acted on suspicion without verifying the information or having material evidence to support the belief that the assessee was a colonizer or dealer in real estate. The Tribunal concluded that the initiation of reassessment proceedings was bad in law and without jurisdiction, thus quashing the reassessment proceedings.

2. Addition of Rs. 6,82,757/- under Section 40A(3) of the IT Act:

The AO made an addition of Rs. 6,82,757/- under Section 40A(3) of the IT Act, which disallows expenditure in cash exceeding a specified limit. The assessee argued that the land purchases were held as capital assets/investments and not as stock in trade. Therefore, no expenditure was claimed in the profit and loss account, making Section 40A(3) inapplicable.

The Tribunal noted that the assessee's profit and loss account and balance sheet supported the claim that the land was held as an investment and not as stock in trade. The Tribunal emphasized that Section 40A(3) applies to expenditure claimed while computing business income, which was not the case here. Since the assessee did not claim any expenditure on account of land purchases in the profit and loss account, the addition under Section 40A(3) was unjustified. Consequently, the Tribunal deleted the addition made by the AO.

Conclusion:

The Tribunal allowed the appeal of the assessee, quashing the initiation of reassessment proceedings under Section 147 of the IT Act and deleting the addition of Rs. 6,82,757/- under Section 40A(3). The Tribunal concluded that the AO acted without jurisdiction and on mere suspicion without verifying the information or having material evidence to support the belief of escaped income. The Tribunal's decision emphasized the necessity of reasonable grounds and material evidence for initiating reassessment proceedings.

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