2017 (9) TMI 465 - AT - Income Tax

Reopening of assessment - payments in cash in contravention to section 40A(3) - AO initiated proceedings u/s 148 to verify certain cash transactions and its disallowability u/s 40A(3) but made the addition made u/s 68 by treating the creditors as unexplained - Held that - On perusal of the reassessment order passed under 147 read with section 143(3) of the Act, it is noted that in AY 2008-09, no disallowance has been made u/s section 40A(3) which form the basis for reopening of the assessment. The AO has however, brought to tax unexplained cash creditors amounting to ₹ 10 lacs which has apparently come to his notice during the course of reassessment proceedings. In AY 2009-10, again similar position exist wherein no disallowance has been made u/s section 40A(3) which form the basis for reopening of the assessment. The AO has however, brought to tax unexplained cash creditors amounting to ₹ 10 lacs and expenses worth ₹ 1.05 lacs have been disallowed towards various expenses which apparently come to his notice during the course of reassessment proceedings. Thus the very foundation of the proceedings u/s 147 are vitiated and accordingly, we are setting aside the order passed by the AO u/s 147 for both the years under consideration. - Decided in favour of assessee.

Summary

Issues:
- Additional ground of appeal challenging the order passed under section 147 of the Income Tax Act
- Validity of reopening of assessment based on reasons recorded by the Assessing Officer
- Applicability of section 40A(3) regarding cash transactions
- Assessment of unexplained cash creditors under section 68 without assessing the income that formed the basis for reopening

Analysis:

1. Additional Ground of Appeal:
The appellant filed two appeals against the order of the Ld. CIT(A) challenging the addition under section 68 of the Income Tax Act. The appellant sought to raise an additional ground of appeal related to the legality of the order passed under section 147 of the Act. This ground was admitted as it was deemed to be a purely legal issue crucial for substantial justice.

2. Validity of Reopening of Assessment:
The Assessing Officer initiated proceedings under section 147 based on information regarding substantial cash transactions and contravention of section 40A(3) of the IT Act. The appellant contended that the reasons for reopening were different from the addition made by the AO, rendering the reopening null and void. The appellant argued that if the income forming the basis for reopening was not assessed or reassessed, the AO could not independently assess other income that came to notice subsequently.

3. Applicability of Section 40A(3):
The AO, while initiating proceedings under section 148 to verify cash transactions under section 40A(3), assessed unexplained cash creditors under section 68. The appellant cited various legal precedents to support the argument that the AO cannot assess income that was not the basis for reopening, especially if the income under section 40A(3) was not disallowed in the original assessment.

4. Assessment of Unexplained Cash Creditors:
In both assessment years, the AO assessed unexplained cash creditors and disallowed expenses without addressing the income related to section 40A(3) that formed the basis for reopening. The Tribunal held that the proceedings under section 147 were flawed as the AO did not assess the income that triggered the reopening. Consequently, the Tribunal set aside the AO's order under section 147 for both years, allowing the additional ground of appeal and dismissing the merit grounds.

In conclusion, the Tribunal's judgment focused on the procedural irregularities in the AO's actions under section 147, emphasizing the necessity for assessing the income that led to the reopening before independently assessing other income. The decision highlights the importance of adhering to legal principles and precedents in income tax assessments to ensure fairness and compliance with the law.