2017 (6) TMI 641 - AT - Income Tax

Reopening of assessment - Disallowance of loss on account of trading in cotton knitted fabrics - Held that - TDS wing of the IT department conducted survey and during the course of said proceedings, understood the entire modus operandi of the assessee s dealings in the trading of cotton knitted fabrics and drew adverse inference about the same by stating that the loss incurred on such transactions is purely fictitious and the documents prepared in that regard in the form of purchase and sale invoices were purely manufactured and the assessee does not even have any premises for storage of the cotton knitted fabrics and the business address shown thereon is a simple space between the stairs of first and second floor, wherein a small table alone could be occupied. In fact the person in charge of the said premises Shri A Pandey, who was seated in the said small office space also stated before the TDS wing that he had been placed there only to attend to phone calls and receive correspondences. Thus the transactions carried out by the assessee, we hold that the information / report furnished by the CIT TDS to the Jurisdictional Administrative CIT of the assessee about the manner in which loss was self created by the assessee in dealing in cotton knitted fabrics, definitely would constitute information, warranting reopening of assessment u/s 147 of the Act. We find from the reasons recorded by the ld AO, there was a live link with formation of belief that income in the hands of the assessee had duly escaped assessment by way of alleged trading loss of cotton knitted fabrics. Hence we are not inclined to accept the arguments of the ld AR on the validity of assumption of jurisdiction u/s 147 of the Act. Hence we hold that the assessment has been validly reopened in the instant case for the Asst Year 2008-09. - Decided against assessee.

Issues Involved:
1. Disallowance of loss on account of trading in cotton knitted fabrics.
2. Validity of reassessment proceedings under Section 147 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Loss on Account of Trading in Cotton Knitted Fabrics:

The primary issue in this appeal is whether the CIT(A) was justified in upholding the disallowance of a trading loss of ?13,61,62,256/- incurred by the assessee in cotton knitted fabrics. The assessee, a non-banking finance company (NBFC) registered with the RBI, engaged in trading of shares, securities, cotton knitted fabrics, and tyres and tubes. The AO disallowed the loss on the grounds that the transactions were self-created with related entities to generate a bogus loss to offset real income from interest.

The AO observed that the assessee purchased cotton knitted fabrics from five entities and sold them to three entities, all of which had common directorships and interests. The AO conducted inquiries and found that transactions were camouflaged as trading to facilitate the creation of a bogus loss. The AO noted discrepancies in purchase and sale prices, indicating that the transactions were not genuine business activities but were designed to create a loss.

The CIT(A) upheld the AO's findings, leading to the assessee's appeal. The tribunal found that the assessee managed its trading activities to match trading losses with interest income, thus avoiding tax liabilities. The pattern of consistent losses in trading activities over multiple years, despite increasing or decreasing interest income, was noted. The tribunal referenced its own decision in the assessee's case for AY 2009-10, where it was concluded that there was no actual movement of goods, and the transactions were merely paper transactions to create a fictitious loss.

The tribunal also noted that the entities involved in the transactions were part of the same group, with common shareholders and directors, further supporting the conclusion that the transactions were not genuine. The tribunal dismissed the assessee's arguments and upheld the disallowance of the trading loss, concluding that the transactions were a colorable device to evade taxes.

2. Validity of Reassessment Proceedings under Section 147:

The second issue is whether the reassessment proceedings under Section 147 were justified. The assessee argued that the reopening of the assessment was based on information from the CIT TDS and the order of the CIT under Section 263 for AY 2007-08, and that the AO did not form an independent belief.

The tribunal noted that the TDS wing conducted a survey and found that the assessee's transactions in cotton knitted fabrics were fictitious, with no actual movement of goods or storage premises. The information from the TDS wing constituted valid information for reopening the assessment. The AO recorded detailed reasons for reopening, establishing a live link with the belief that income had escaped assessment due to the alleged trading loss.

The tribunal held that the reopening of the assessment was valid and dismissed the assessee's arguments regarding the non-application of the AO's independent mind. The reassessment proceedings were upheld as justified based on the information received and the detailed reasons recorded by the AO.

Conclusion:

The tribunal dismissed the appeal of the assessee, upholding the disallowance of the trading loss and the validity of the reassessment proceedings under Section 147. The tribunal found that the transactions were not genuine and were designed to create a fictitious loss to offset interest income, thereby evading taxes. The reassessment proceedings were based on valid information and were conducted in accordance with the law.

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