2019 (9) TMI 811 - AT - Income Tax

Reopening of assessment u/s 147 - notice on the basis of audit objection after getting approval - addition invoking provision of section 40A(3) - HELD THAT - As gone through the reasons recorded by the Assessing Officer/ITO, Ward-Katihar for reopening and the approval thereof by the Ld. Jt.. CIT, Range-1, Bhagalpur and found that the AO has not applied his mind so as to come to an independent conclusion that he has reason to believe that income has escaped during the year. AO has mechanically issued notice u/s. 148 of the Act, on the basis of audit objection. The reopening in the case of the assessee for the Asstt. Year in dispute is bad in law and deserves to be quashed. The superior authority has to examine the reasons, material or grounds and to judge whether they are sufficient and adequate to the formation of the necessary belief on the part of the assessing officer. If, after applying his mind and also recording his reasons, howsoever briefly, the Commissioner is of the opinion that the AO's belief is well reasoned and bonafide, he is to accord his sanction to the issue of notice u/s. 148 of the Act. In the instant case, find from the perusal of the order sheet which is on record, the Jt. CIT has simply put Yes and signed the report thereby giving sanction to the AO. Nowhere the Jt. CIT has recorded a satisfaction note not even in brief. Therefore, it cannot be said that the Jt. CIT has accorded sanction after applying his mind and after recording his satisfaction - no hesitation to hold that the reopening proceedings vis- -vis provisions of Sec. 151 of the Act are bad in law and the assessment has to be declared as void ab initio. - Decided in favour of assessee

Issues Involved:
1. Validity of reassessment proceedings initiated under Section 147 and issuance of notice under Section 148 based on audit objection.
2. Confirmation of disallowance under Section 40A(3) of the Income Tax Act, 1961.
3. Charge of interest under Sections 234B and 234C.

Detailed Analysis:

1. Validity of Reassessment Proceedings Initiated Under Section 147 and Issuance of Notice Under Section 148 Based on Audit Objection:

The primary issue raised by the assessee was the validity of the reassessment proceedings initiated by the Assessing Officer (AO) under Section 147 and the issuance of notice under Section 148 based on an audit objection. The assessee argued that no fresh material was available to the department, and the initiation of proceedings was based solely on the material already on record. The assessee contended that the initiation of proceedings under Section 147 and the issuance of notice under Section 148 were arbitrary, unjustified, void ab initio, and vitiated in law.

The Tribunal noted that the original assessment under Section 143(3) was completed on 28.11.2010. Subsequently, the internal audit team pointed out that the assessee had made cash payments exceeding ?20,000 on several dates, violating Section 40A(3). As a result, the case was reopened, and a notice under Section 148 was issued. The AO added ?16,75,358 to the total income of the assessee for violating Section 40A(3).

The assessee argued that the reasons recorded for reopening the assessment were without proper application of mind and that the approval for reopening was granted mechanically. The Tribunal found that the AO had not applied his mind independently and had issued the notice based on the audit objection. The Tribunal referred to various case laws, including the decision of the Hon'ble High Court of Madhya Pradesh in CIT vs. S. Goyanka Lime & Chemical Ltd., where it was held that mechanical recording of satisfaction by the Joint Commissioner was unsustainable.

The Tribunal concluded that the reopening of the assessment based on the audit objection was bad in law and deserved to be quashed. The Tribunal emphasized that the superior authority must examine the reasons, material, or grounds and judge whether they are sufficient for the formation of the necessary belief by the AO.

2. Confirmation of Disallowance Under Section 40A(3) of the Income Tax Act, 1961:

The assessee challenged the confirmation of disallowance of ?16,75,358 made by the AO for violating Section 40A(3). The assessee argued that once the gross profit rate was applied, it indicated the rejection of the books of account, and there was no need to invoke the provisions of Section 40A(3).

The Tribunal noted that the AO had observed that the assessee made payments to suppliers through demand drafts on some occasions, indicating that banking facilities were available. The AO concluded that the provisions of Section 40A(3) were violated. The Tribunal found that the AO had not rejected the books of account but had made an ad-hoc addition to the gross profit rate. The Tribunal held that the plea that no separate disallowance under Section 40A(3) could be made once the gross profit rate was applied was not tenable.

3. Charge of Interest Under Sections 234B and 234C:

The assessee argued that the charge of interest under Sections 234B and 234C was arbitrary and unjust. The Tribunal did not adjudicate on this issue separately, as it had already held that the reassessment proceedings were not valid.

Conclusion:

The Tribunal allowed the appeal of the assessee on the legal issue of the validity of reassessment proceedings. The Tribunal held that the reopening of the assessment based on the audit objection was bad in law and deserved to be quashed. Consequently, other grounds raised by the assessee on merits were not adjudicated upon. The appeal of the assessee was allowed on the legal issue, and the order was pronounced in the open court on 17/09/2019.

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