2018 (8) TMI 1199 - AT - Income Tax

Validity of reassessment proceedings u/s 147 - initiation of proceedings u/s. 148 - The case of the revenue for disallowing the expenses was that in the search conducted u/s. 132 of the act in the case of M/s. Murudeshwar Ceramics Ltd., it transpired that the assessee received labour charges and transportation charges from the above company, but did not incur any expenditure as the assessee did not actually carry out any activity for the aforesaid company. Held that - there was no direct or live nexus with the belief formed by the AO that income of the assessee has escaped assessment compared with the material that came to the possession of the AO. In other words, there was nothing incriminating against the assessee found in the course of search, which can lead to a belief that income of assessee chargeable to tax has escaped assessment by reason of assessee claiming bogus expenditure. The statements recorded in this regard are general and vague and admission in the case of person searched cannot be the basis to form such belief. I therefore quash the proceedings u/s. 148 of the Act and allow the appeal of the assessee. Decided in favor of assessee.

Issues Involved:
1. Validity of initiation of reassessment proceedings under Section 148 of the Income-Tax Act, 1961.
2. Disallowance of expenses claimed by the assessee.

Detailed Analysis:

1. Validity of initiation of reassessment proceedings under Section 148 of the Income-Tax Act, 1961:

The primary issue in this case was the validity of the initiation of reassessment proceedings by the Assessing Officer (AO) under Section 148 of the Income-Tax Act, 1961. The AO issued a notice under Section 148 on 27.03.2014 for the Assessment Year (AY) 2009-10, proposing to reassess the total income of the assessee based on the belief that income had escaped assessment. The reasons recorded by the AO for this belief were that M/s Murudeshwar Ceramics Ltd. had inflated expenses using the assessee's name, and the assessee's cash book revealed expenses incurred in cash supported only by self-made vouchers. Additionally, during a search, various documents including blank signed cheque books and rubber stamps of the assessee were found at the office of M/s Murudeshwar Ceramics Ltd., and some partners admitted that no actual activities were carried out.

The assessee challenged the validity of these reassessment proceedings, but the AO and the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the initiation of the proceedings. The Tribunal, however, referred to a similar case, M/s. Mookambika Enterprises v. DCIT, where reassessment proceedings were initiated based on identical reasons. In that case, the Tribunal held that the initiation of reassessment proceedings was not valid, stating that the reasons recorded by the AO did not have a direct and live nexus with the belief that income had escaped assessment. It was noted that the statements recorded were general and vague, and there was no specific mention of the assessee's partner admitting to not carrying out any activities.

In the present case, the Tribunal found that the AO had accepted the entire business activity of the assessee as genuine, except for an ad hoc disallowance of 15% on cash expenditure. This indicated that the AO's basis for forming the belief that income had escaped assessment was not substantiated. The Tribunal concluded that there was no new material or fact that came to the AO's knowledge at the time of framing the reassessment, and the entire record was already available when the notice under Section 148 was issued. Therefore, the Tribunal held that the initiation of reassessment proceedings was not sustainable and quashed the proceedings under Section 148 of the Act.

2. Disallowance of expenses claimed by the assessee:

The second issue was the disallowance of expenses claimed by the assessee. The AO disallowed expenses amounting to ?5,93,323 during the reassessment proceedings, asserting that the assessee received labour charges and transportation charges from M/s Murudeshwar Ceramics Ltd. but did not incur any expenditure as no actual activities were carried out. However, the Tribunal found that the assessee had provided detailed explanations and documentary evidence regarding the supply of labour and transportation services, including attendance registers, PF and ESI deductions, and service tax payments.

The Tribunal noted that the AO, in the reassessment proceedings, accepted the genuineness of the assessee's business activities and made only an ad hoc disallowance of 15% on cash expenditure. This indicated that the AO did not find the entire claim of expenditure to be bogus or excessive. The Tribunal concluded that the reasons recorded by the AO for reopening the assessment did not have a direct and live nexus with the belief that income had escaped assessment, and the reopening was based on general and vague statements without any tangible material. Consequently, the Tribunal did not take up the challenge to the addition on merits, as the reassessment proceedings themselves were quashed.

Conclusion:

The Tribunal allowed the appeal of the assessee, quashing the reassessment proceedings initiated under Section 148 of the Income-Tax Act, 1961, and did not consider the merits of the addition of expenses. The decision emphasized the necessity of a direct and live nexus between the material available to the AO and the belief that income had escaped assessment for valid reassessment proceedings.

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