2017 (2) TMI 1121 - AT - Income Tax

Reopening of assessment - arrangement to the sale of shares undisclosed - Held that - Proviso appended to section 147 puts an embargo upon the powers of the AO for reopening of the assessment in case where an assessment was made under section 143(3) of the Income Tax Act for relevant assessment year and four years have expired from the end of the assessment year. In such cases, no action shall be taken under section 147 unless it is established that income chargeable to tax has escaped on account of failure of the assessee to disclose fully and truly all the material facts necessary for his assessment. Thus the AO was bound to demonstrate that the assessee has failed to disclose material facts fully and truly which has resulted escapement of income. If he fails to demonstrate this aspect, then, in the case where scrutiny assessment has been made and four years have expired, he cannot take action under section 147 of the Income Tax Act. A perusal of the reasons would indicate that the AO has nowhere demonstrated this fact. Apart from the above, a perusal of the assessment order passed under section 143(3) would indicate that all these facts have duly been considered and the AO has accepted the stand of the assessee. Allegation of the AO in the reasons is that in the memorandum of arrangement to the sale of shares shows that a sum of ₹ 28,90,500/- was to be received by the assessee from M/s.Manish Multi Packfilms Pvt. Ltd. It was a sum advanced by the assessee to the company. The AO has observed that a perusal of the balance sheet for the F.Y.2002-03 i.e. 31.3.2003 does not discern that the assessee has advanced any amount. The stand of the assessee is that this sum was advanced after 31.3.2003 and it was repaid during the F.Y.2003-04 itself. Therefore, it will not reflect in the balance sheet of Manish Multi Packingfilms Pvt. Ltd. in F.Y.2002-03. The AO has sought to reopen the assessment after expiry of four years without establishing nexus of the details. He has not analytically examined the alleged advance given by the assessee and his belief that this amount should be available in the balance sheet for F.Y.2002-03. When the assessee has not paid any amount in F.Y.2002-03 to the company how it will appear in the balance sheet. Without looking to the accounts, he simply recorded the reasons. Thus, there is no basis for reopening of the assessment and the ld.CIT(A) has rightly quashed it. We do not find any error in the order of the ld.CIT(A). It is upheld - Decided against revenue.

Summary

Issues Involved:
1. Validity of reopening the assessment under section 147 of the Income Tax Act.
2. Disallowance of Short Term Capital Loss of ?26,44,800.
3. Addition of ?28,90,500 as deemed income.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147:
The Revenue contended that the CIT(A) erred in quashing the reassessment order, holding that reopening under section 147 was bad in law. The assessee filed his return on 31.3.2005, and the original assessment was completed under section 143(3) on 27.11.2006. The AO sought to reopen the assessment on 25.10.2010, beyond the four-year limit from the end of the relevant assessment year. The AO's reasons for reopening included disallowance of a Short Term Capital Loss and addition of a sum as deemed income. However, the Tribunal highlighted that for reopening beyond four years, the AO must demonstrate that the assessee failed to disclose fully and truly all material facts necessary for assessment, which was not established in this case. The original assessment order had already considered these facts, and the AO had accepted the assessee's stand. Consequently, the Tribunal upheld the CIT(A)'s decision to quash the reassessment order.

2. Disallowance of Short Term Capital Loss of ?26,44,800:
The AO disallowed the Short Term Capital Loss claimed by the assessee on the grounds that the sale of shares was a colorable device to evade tax. The assessee had sold 304,000 shares of M/s. Manish Multipack Films Pvt. Ltd. at ?1.30 per share, incurring a loss, which was set off against Long Term Capital Gain. The CIT(A) found that the sale price was determined as per the intrinsic value agreed upon in the settlement agreement and that the AO had no evidence to prove that the assessee received any additional compensation. The CIT(A) relied on the ITAT Ahmedabad's decision in Allure Investments & Finance Pvt. Ltd. Vs. ACIT, which stated that for computing capital gain, the sale consideration received by the assessee should be adopted, not the market value. The Tribunal upheld the CIT(A)'s deletion of the disallowance, finding it unjustifiable and based on presumption and guesswork.

3. Addition of ?28,90,500 as Deemed Income:
The AO added ?28,90,500 as deemed income, alleging that the assessee's balance sheet for F.Y. 2002-03 did not reflect this amount as a loan or deposit. The assessee contended that this sum was advanced after 31.3.2003 and repaid within F.Y. 2003-04, hence it would not appear in the balance sheet for F.Y. 2002-03. The CIT(A) found that the AO misunderstood the facts, as transactions occurring after 31.3.2003 would not be in the balance sheet for 31.3.2003. The CIT(A) noted that all transactions were made by cheques and cross-confirmed in the books of both the assessee and M/s. Manish Multipack Films Pvt. Ltd. The Tribunal upheld the CIT(A)'s deletion of the addition, finding the AO's reasoning illogical and the addition unjustifiable.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order quashing the reassessment and deleting both the disallowance of Short Term Capital Loss and the addition of ?28,90,500 as deemed income. The Tribunal found no error in the CIT(A)'s conclusions, affirming that the reopening of the assessment was not justified and the additions were based on incorrect assumptions and lack of evidence.