2014 (7) TMI 721 - HC - Income Tax

Service of notice u/s 282 for scrutiny assessment u/s 143(2) Loss incurred because of drop in value of closing stock Held that - The questionnaire/notice sent by the AO to the assessee which mentioned that the notice u/s 143(2) had been duly received by the assessee on 31.10.2001 was not controverted during the assessment proceedings - the conclusion of the CIT that the assessee had duly received the notice in question on 31.10.2001 cannot be faulted. - the contention that the petitioner cannot be precluded from raising the objection as to receipt of notice since Section 292BB of the Act was not in force during the relevant Assessment Year is also not acceptable. Best judgement assessment - whether arbitrary and unreasonable - assessee claimed drop in the value of the closing stock and shortage in stocks. - Held that - Such losses were clearly an aberration and in absence of sufficient material could not be accepted by the Assessing Officer in a best judgment assessment, especially where there was no material to substantiate the loss as declared in the returns and the statement of accounts furnished along with it. The Assessing Officer, therefore, rejected the loss as returned by the assessee and in our view, rightly so. Increase in sundry creditors and unsecured loans Held that - The AO also made additions on account of increase in sundry creditors and unsecured loans - assessee could easily obtain confirmation of outstanding balances from third parties, however, no confirmation was supplied to the AO - The scale of operations of the assessee during the year was not materially different from that in the preceding year, and in the circumstances a significant increase in the sundry creditors and unsecured loans was clearly unexplained and in the circumstances the Assessing Officer added the same u/s 68 of the Act - AO also added the increase in the account of the partners - The assessee attempted to explain the same by stating that the additions were from the funds withdrawn by the partners the individual accounts of the partners which could have substantiated claim were, apparently, not produced before the AO - the explanation was also not accepted thus, there was no infirmity in the order Decided against Assessee.

Summary

Issues Involved:
1. Validity of the service of notice under Section 143(2) of the Income Tax Act, 1961.
2. Validity of the assessment order under Section 144 of the Income Tax Act.
3. Legality of the additions made by the Assessing Officer under Section 68 of the Income Tax Act.
4. Applicability of Section 292BB of the Income Tax Act.
5. Compliance with Section 282(2)(a) of the Income Tax Act.
6. Reasonableness of the best judgment assessment.

Issue-wise Detailed Analysis:

1. Validity of the Service of Notice under Section 143(2):
The petitioners contended that the notice under Section 143(2) was not served within the prescribed period, rendering the assessment proceedings without jurisdiction. The court noted that a notice was dispatched on 30.10.2001, and subsequent notices were received by the assessee. The court presumed that the notice was correctly addressed and received, as the assessee participated in the proceedings without disputing the service of the initial notice. The court found no merit in the contention that the notice was not served within the prescribed period.

2. Validity of the Assessment Order under Section 144:
The assessment order dated 28.02.2003 was passed on a best judgment basis due to the assessee's failure to produce books of accounts and other relevant documents. The court noted that the assessee did not produce the required documents despite multiple notices and opportunities. The court held that the Assessing Officer was justified in making a best judgment assessment in the absence of the necessary records.

3. Legality of Additions under Section 68:
The Assessing Officer made additions for unexplained creditors, unsecured loans, and partners' capital accounts due to the absence of supporting documents. The court observed that the assessee failed to provide confirmations for outstanding balances from third parties and did not substantiate the additions to partners' accounts. The court upheld the additions made under Section 68, finding no flaw in the Assessing Officer's approach.

4. Applicability of Section 292BB:
The petitioners argued that Section 292BB, introduced by the Finance Act, 2008, was not applicable to the period in question. The court distinguished between precluding an objection raised during assessment proceedings and one raised subsequently. The court held that since the assessee did not dispute the receipt of the notice during the assessment proceedings, they were precluded from raising this objection later. The court did not find it necessary to examine the applicability of Section 292BB further.

5. Compliance with Section 282(2)(a):
The petitioners contended that the notice was invalid as it was not addressed to the partners of the firm as required by Section 282(2)(a). The court clarified that Section 282(2)(a) allows a notice to be addressed to any member of the firm but does not invalidate a notice addressed to the firm itself. The court found this contention to be without merit.

6. Reasonableness of the Best Judgment Assessment:
The court examined whether the best judgment assessment was arbitrary or unreasonable. It noted that the assessee's financial results for the year in question showed significant discrepancies compared to the previous year, which were not substantiated by sufficient material. The court found that the Assessing Officer's rejection of the declared losses and the additions made were justified. The court held that the assessment was neither arbitrary nor unreasonable.

Conclusion:
The court found no infirmity in the impugned order and dismissed the writ petition, upholding the validity of the assessment order and the additions made by the Assessing Officer. The court emphasized the importance of timely and accurate compliance with notices and the provision of necessary documents during assessment proceedings.