2020 (2) TMI 69 - AT - Income Tax

Reopening of assessment u/s 147 - expenditure not allowable under section 37 - HELD THAT - There was no fresh tangible material before the Assessing Officer on the basis of which he formed his belief that income escaped in the case of the assessee. The only reason which has been recorded by the Assessing Officer is that it appeared to him that those expenses were not allowable under section 37 of the Act. In our opinion, this is mere change of opinion based on the suspicion without any tangible information that said expenditure was not allowable under section 37 of the Act. The Assessing Officer was not sure whether the said expenditure was not allowable under section 37 of the Act. We find that Hon ble Gujarat High Court in the case of Nitin P Shah Vs DCIT, 2004 (12) TMI 64 - GUJARAT HIGH COURT quashed the reopening of the assessment, where the Assessing Officer only stated that note attached to return of income indicated possible escapement of income and was not sure about it. In the order passed u/s 143(3) in the case of MGFD, the amount of ₹ 57 crores has been accepted by the AO as the share of revenue @ 60% of the hotel project at Jaipur. We, therefore, find merit in the submission of the ld. Counsel for the assessee that when the AO is not discarding the contribution of MGFD towards the completion of the project which is for the financing, implementation, providing brand name and other technical assistance for completion of the project, therefore, there is a commercial expediency in incurring the expenditure and the AO has no power to sit in the arm chair of the businessman and decide as to what would be the reasonable expenditure which is required to be incurred. - Decided in favour of assessee.

Summary

Issues Involved:

1. Validity of the reassessment proceedings under section 147/143(3) of the Income Tax Act, 1961.
2. Disallowance of travel expenditure amounting to ?11,00,000 for hiring a chartered flight.

Issue-wise Detailed Analysis:

1. Validity of the reassessment proceedings under section 147/143(3) of the Income Tax Act, 1961:

The assessee contested the validity of the reassessment proceedings initiated by the Assessing Officer (AO) under section 147/143(3) of the Income Tax Act, 1961. The primary argument was that the reassessment was initiated without a "reason to believe" that income had escaped assessment, based on incorrect inferences drawn from existing records, and without independent application of mind by the AO. The assessee also argued that the reassessment was based on third-party information without tangible material.

The CIT(A) upheld the validity of the reassessment proceedings, stating that the AO had reason to believe that the expenses of ?11,00,000 for hiring a chartered flight were not incurred for business purposes. The AO's belief was based on the unusual nature of the expenses for the business purposes of the assessee company. The CIT(A) concluded that the AO's action was justified and dismissed the assessee's grounds challenging the issuance of notice under section 148.

Upon appeal, the Tribunal found that the AO issued the notice under section 148 based on suspicion without any tangible material. The recorded reasons indicated that the AO was not certain whether the expenses were allowable under section 37 of the Act. The Tribunal cited the Gujarat High Court's decision in the case of Nitin P Shah Vs DCIT, where reopening was quashed because the AO's belief was based on "possible escapement of income" without concrete information. Consequently, the Tribunal quashed the reassessment proceedings, allowing the assessee's grounds challenging the reassessment.

2. Disallowance of travel expenditure amounting to ?11,00,000 for hiring a chartered flight:

The assessee also contested the disallowance of travel expenditure amounting to ?11,00,000 incurred for hiring a chartered flight. The CIT(A) upheld the disallowance, stating that the assessee failed to substantiate that the expenditure was incurred wholly and exclusively for business purposes. The CIT(A) noted discrepancies in the assessee's submissions, including the lack of evidence of business activities at the travel destinations and the absence of exigency for hiring the chartered flight. The CIT(A) also rejected the alternate argument to restrict the disallowance to ?9,97,280, as the total invoice amount of ?11,00,000 was claimed in the P&L account.

Since the Tribunal quashed the reassessment proceedings, the grounds challenging the merit of the addition were rendered academic and were not adjudicated.

Conclusion:

The Tribunal allowed the appeal of the assessee, quashing the reassessment proceedings under section 147/143(3) of the Income Tax Act, 1961, on the grounds that the AO's belief was based on suspicion without tangible material. Consequently, the issue of disallowance of travel expenditure was not adjudicated, as it became academic. The order was pronounced on 7th January, 2020.