2018 (4) TMI 1792 - AT - Income Tax

Validity of reopening of assessment u/s 147 - Addition u/s 68 - reasons simply states that the assessee is a beneficiary of the accommodation entry provided by Sh. S.K Jain group as per the information received from Investigation wing, Delhi - HELD THAT - Even though the AO was in receipt of specific information that the assessee was beneficiary of accommodation entry, the fact remains that the information so received from the Investigation wing was not supplied to the assessee along with the reasons recorded before the issuance of notice u/s 148 of the Act and even the reasons so recorded are extremely scanty and vague and there is no mention of nature and quantum of accommodation entries which has escaped assessment. We also wonder as to how the ld CIT has accorded his approval on such scanty reasoning by the AO. Merely by stating that certain information has been received from the Investigation wing that the assessee is beneficiary of certain accommodation entry is not sufficient enough for the AO in assuming jurisdiction under section 147 in the instant case and the order so passed by the AO is hereby quashed and set-aside. In the result, ground no. 1 of the assessee s appeal is hereby allowed. Addition u/s 68 - in the instant case, the assessee company has filed copies of the share application form, return of allotment filed with ROC, copies of the bank statements, copies of the financial statements and confirmations of these parties. AO has issued letters u/s 133(6) to these parties and has also called for personal appearance of Sh G.L Gupta and one of the directors of the assessee company. It is also a fact that there notices have not returned back undelivered and at the same time, there has been no compliance. It is therefore a case which is shade different than the one we decided supra. At the same time, the fact remains that inspite of non-compliance of these notices and non-appearance which cannot be a sole basis for disallowance, the AO has to give a specific finding and record his satisfaction regarding non-acceptance of documents so submitted by the assessee. We are therefore of the view that that in absence of any falsity which have been found in the documents so submitted by the assessee company to prove the identity, creditworthiness and genuineness of the share transaction and any satisfaction to that effect recorded by the AO, these documents cannot be summarily rejected as has been done by the AO in the instant case - no basis for making the addition under section 68 - Decided in favour of assessee Disallowance of various expenses - as argued AO only on surmises made a lump sum disallowance of 50% of these expenses and the ld. CIT(A) without any basis restricted it to 25% - HELD THAT - We find that it is a case of adhoc disallowance of expenses which is not permissible in the eye of law. No finding has been given by the lower authorities that these are bogus expenditure or the expenditure has not been incurred for the purposes of the business. It is not the case of the Revenue that the business of the assessee has not been set up. In light of the same, the disallowance so confirmed by the ld CIT(A) is hereby deleted. The ground taken by the assessee is thus allowed.

Summary

Issues Involved:
1. Validity of the order passed by the AO under section 147 of the I.T. Act, 1961.
2. Addition of ?30 lakhs under section 68 by treating the share capital money received from certain parties as unexplained.
3. Lump sum disallowance of ?31,171, being 25% of various expenses of ?1,24,682.

Issue-wise Detailed Analysis:

1. Validity of the Order Passed by the AO under Section 147 of the I.T. Act, 1961:
The assessee challenged the validity of the order passed by the AO under section 147, arguing that the primary condition for initiating action under section 147 is that the AO must have reason to believe that any income chargeable to tax has escaped assessment. The reasons recorded by the AO were claimed to be vague and not specific, as they were based solely on information received from the Investigation Wing, Delhi, without independent application of mind. The AO’s reasons did not mention the names, addresses, or quantum of the alleged accommodation entries. The assessee cited various judicial precedents, including the Hon’ble Bombay High Court's decision in Hindustan Lever Ltd. v. R.B. Wadkar, which emphasized that reasons recorded by the AO must be clear, unambiguous, and self-explanatory, and cannot be supplemented by affidavits or oral submissions.

The Tribunal found that the reasons recorded by the AO were indeed vague and lacked specifics such as the nature, quantum, and entities involved in the alleged accommodation entries. The Tribunal also noted that the information received from the Investigation Wing was not supplied to the assessee along with the reasons recorded. Consequently, the Tribunal held that the reopening of the assessment was not justified and quashed the order passed by the AO under section 147.

2. Addition of ?30 Lakhs under Section 68:
On the merits, the assessee received share capital/share application money of ?30 lakhs from three parties. The AO, based on information from the Investigation Wing, concluded that the assessee was a beneficiary of accommodation entries provided by the S.K. Jain group. The AO issued letters under section 133(6) to these parties, but no information was received. The AO also required the assessee to produce certain individuals, which the assessee failed to do. Consequently, the AO made an addition of ?30 lakhs under section 68.

The Tribunal noted that the assessee had provided various documents to establish the identity, genuineness, and creditworthiness of the entities from which the share capital was received. These included share application forms, confirmations, bank statements, balance sheets, and ROC returns. The Tribunal also observed that the AO did not provide the assessee with the opportunity to cross-examine the individuals whose statements were relied upon, nor did the AO confront the assessee with the specific information and documents available with the department. Citing judicial precedents, the Tribunal held that the addition under section 68 was not justified and deleted the addition.

3. Lump Sum Disallowance of ?31,171:
The assessee challenged the sustenance of disallowance of ?31,171 in respect of various expenses claimed. The AO had made a lump sum disallowance of 50% of these expenses, which the CIT(A) restricted to 25%. The assessee argued that the lower authorities did not point out any specific instances of expenses that were not properly vouched or were not genuine and that these were regular business expenditures required to be incurred even if no business was carried out during the year.

The Tribunal found that the disallowance was made on an ad hoc basis without any specific finding that the expenses were bogus or not incurred for business purposes. The Tribunal held that ad hoc disallowance of expenses is not permissible in law and deleted the disallowance.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, quashing the order passed by the AO under section 147, deleting the addition of ?30 lakhs under section 68, and deleting the lump sum disallowance of ?31,171 in respect of various expenses.