2018 (8) TMI 1631 - AT - Income Tax

Reopening of assessment - limitation period - requirement of obtaining sanction U/s 151 - Held that - From the plain reading of Section 150(1) of the Act, it is clear that it begins with non-obstante clause as far as the limitation provided U/s 149 of the Act and therefore, Section 150(1) has an overriding effect on Section 149 and not over Section 151 - requirement of sanction U/s 151 of the Act is in the nature of check and balance and it is a measure against the misuse of power by the assessing authority for assessment or reassessment based the reasons not found satisfactory by the authorities provided U/s 151 - Accordingly, when the Assessing Officer admittedly issued notice U/s 148 after the four years from the end of the assessment year and without obtaining the sanction U/s 151 then such notice issued U/s 148 is in violation of provisions of Section 151 of the Act and consequently the same is invalid and the entire reassessment proceedings stand vitiated. Hence, we hold that the reopening of the assessee is not valid and the same is quashed. Disallowance of interest paid on unsecured loans - AO disallowed claim on the ground that the loan itself were found to be unexplained and addition was made U/s 68 of the Act in the earlier years and therefore, the claim of interest being consequential to the claim of unsecured loans which was disallowed in the earlier year - Held that - Since this is a consequential issue to the issue of unsecured loans treated as unexplained cash credit by the Assessing Officer in the earlier year, accordingly, we set aside this issue to the record of the Assessing Officer for quantifying the amount of disallowance of interest if any after considering the addition made U/s 68 of the Act attend finality in the earlier assessment years. Accordingly, this ground of appeal is allowed for statistical purposes only. Addition of contract receipt as unaccounted income - Held that - As AR of the assessee has now referred to the sale bills in support of his claim, however, we find that after expiry of about 10 years and in absence of books of account as well as other supporting evidence, this fact cannot be verified even from the government offices for want of relevant record preserved by the government offices after expiry of such a long period. Hence, in the facts and circumstances when the assessee did not produce books of account as well as other evidence in support of its claim that this amount of ₹ 7,68,966/- is part of the sales recorded in the books, then we do not find any reason to interfere in the orders of the authorities below qua this issue. Hence, this ground of assessee s appeal is dismissed Unaccounted income - addition on account of interest income which accrued to the assessee from the debtor but the assessee has not included said amount in the return of income - Held that - We find that undisputedly the assessee is following mercantile system of accounting and therefore, it is not permitted to follow the cash system of accounting only for a particular income when all other income are recognized by following the mercantile system of account. Hence, in view of the admitted position and as per the audit report the assessee is following mercantile system of accounting and the interest on unsecured loan given by the assessee duly recognized by the debtor and became due to the assessee then the same would be considered as income of the year under consideration. Hence, we do not find any error or illegality in the orders of the authorities below qua this issue. Hence, this ground of assessee s appeal is dismissed. Addition on account of various expenses - Held that - There is no dispute that the assessee has not produced books of account as well as supporting vouchers for the expenditure booked in the P&L account. Though, the expenditure debited to the P&L account may not be excessive, however, the assessee is under obligation to establish that the said expenditure was incurred wholly and exclusively for the business of the assessee. In absence of any supporting evidence, there is a clear default on the part of the assessee to prove the case that the entire expenditure was incurred wholly or exclusively for the purpose of business of the assessee. Hence, in the facts and circumstances of the case, when the ld. CIT(A) has already restricted the disallowance to ₹ 50,000/- as against of ₹ 1,00,000/- made by the Assessing Officer, we do not find any reason to interfere in the order of the ld. CIT(A)

Summary

Issues Involved
1. Validity of reopening the assessment under Section 147 without obtaining proper sanction under Section 151.
2. Addition of unsecured loan as unexplained credits under Section 68.
3. Disallowance of expenses.
4. Disallowance of interest on unsecured loans.
5. Addition of contract receipts as unaccounted income.
6. Taxation of interest income.
7. Additional disallowance of expenses.

Detailed Analysis

Issue 1: Validity of Reopening the Assessment under Section 147 Without Proper Sanction under Section 151
The assessee contended that the reopening of the assessment for A.Y. 2006-07 was invalid as it was done without obtaining the requisite sanction under Section 151 of the Income Tax Act. The reopening was based on the CIT(A)'s order for A.Y. 2007-08, which indicated that a sum of ?13,24,300/- pertained to A.Y. 2006-07. The Tribunal found that the Assessing Officer (AO) issued the notice under Section 148 after the expiry of four years from the end of the assessment year without obtaining the necessary approval under Section 151. The Tribunal held that the reopening was invalid and quashed the reassessment proceedings, emphasizing that the requirement of sanction under Section 151 is mandatory for issuing a notice under Section 148 after four years.

Issue 2: Addition of Unsecured Loan as Unexplained Credits under Section 68
The AO added ?13,24,300/- as unexplained credits under Section 68, which was confirmed by the CIT(A). However, since the Tribunal quashed the reassessment proceedings due to the invalid reopening, the addition of the unsecured loan was also quashed.

Issue 3: Disallowance of Expenses
The AO made a disallowance of ?1,00,000/- out of which the CIT(A) confirmed ?50,000/-. The Tribunal upheld the CIT(A)'s decision, noting that the assessee failed to produce books of account and supporting vouchers to substantiate the expenses. The Tribunal found no reason to interfere with the CIT(A)'s order.

Issue 4: Disallowance of Interest on Unsecured Loans
For A.Y. 2009-10, the AO disallowed interest of ?4,94,606/- on unsecured loans, which was confirmed by the CIT(A). The Tribunal noted that this issue was consequential to the addition under Section 68 in earlier years. The Tribunal set aside this issue to the AO to quantify the disallowance of interest after considering the finality of the addition under Section 68 in earlier years.

Issue 5: Addition of Contract Receipts as Unaccounted Income
The AO added ?7,68,966/- as unaccounted income based on details in Form 26AS, which was confirmed by the CIT(A). The assessee failed to produce books of account or supporting evidence to show that this amount was part of the sales recorded in the books. The Tribunal upheld the addition, noting the assessee's inability to produce the necessary records even during remand proceedings.

Issue 6: Taxation of Interest Income
The AO added ?50,241/- as interest income, which was not included by the assessee in the return. The CIT(A) confirmed this addition. The Tribunal upheld the addition, noting that the assessee followed the mercantile system of accounting and was required to recognize income on accrual basis. The interest was acknowledged by the debtor and thus should have been included in the income for the year under consideration.

Issue 7: Additional Disallowance of Expenses
The AO made an ad hoc disallowance of ?1,00,000/-, which the CIT(A) restricted to ?50,000/-. The Tribunal upheld the CIT(A)'s decision, noting the assessee's failure to produce books of account and supporting vouchers. The Tribunal found no reason to interfere with the CIT(A)'s order.

Conclusion
The appeal for A.Y. 2006-07 was allowed due to the invalid reopening of assessment, and the reassessment proceedings were quashed. For A.Y. 2009-10, the appeal was partly allowed for statistical purposes, with specific issues set aside for further examination by the AO. The Tribunal upheld the disallowances and additions made by the AO and CIT(A) where the assessee failed to provide sufficient evidence.