2020 (9) TMI 1041 - AT - Income Tax

Reopening of assessment u/s 147 - Addition as Share application money since 31.03.2009, treated as cessation of trading liabilities u/s 41(1) - HELD THAT - Hon ble Supreme court, in the case of ACIT vs Rajesh Jhaveri Stock Brokers Pvt. Ltd. 2007 (5) TMI 197 - SUPREME COURT had clearly held that reasons to believe does not mean that the reasons for reopening should have been factually ascertained by legal evidence or conclusion before the reopening of an assessment. As in the case of Raymond woolen Mills Ltd 1997 (12) TMI 12 - SUPREME COURT had held that for determining, whether initiation of reopening proceedings was valid, it has only to be seen, whether there was prima-facie some material on the basis of which, the department would reopen the case. It further held that the sufficiency or correctness of the material is not a thing to be considered at the stage of issue of notice. There is no merit in arguments taken by the Ld. Counsel for the assesee challenging reopening of assessment. Additions made towards cessation of trading liability u/s 41(1) - Once the liability has been paid back during AY 2009-10, then the same cannot be considered as continued in the books of accounts as on 31/03/2010, in order to invoke provisions of section 41(1) on the basis of subsequent enquiries conducted during the course of assessment proceedings. In fact, the evidences filed before the authorities have clearly established the fact that the assessee has paid said liability in AY 2009-10. Therefore, we are of the considered view that liability, if at all is ceased to exist, then said liability had been ceased to exist in the FY 2008-09 relevant to AY 2009-10, but not for the AY 2010-11. AO, as well as the Ld.CIT(A) were erred in, coming to the conclusion that the liability is ceased to exist during AY 2010-11. None of the conditions prescribed therein u/s 41(1) were fulfilled, in order to bring said liability within the ambit of provisions of section 41(1) because neither, the liability is ceased to exist during the impugned assessment year, nor the Ld. AO proved that it is a non-genuine trading liability. On the other hand, the assessee has filed necessary evidences to prove that the liability was existed in the books of accounts up to 31/03/2009 and on 31/03/2009 said liability has been fully paid back by converting, the same into share application money with the consent of creditors. AO, as well as the Ld.CIT (A) was completely erred in making additions towards cessation or remission of liability u/s 41(1) of the Act, towards share application money - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Reopening of the case under Section 148 of the Income Tax Act, 1961.
2. Addition of ?15,15,00,000 as cessation of trading liabilities under Section 41(1) of the Income Tax Act, 1961.
3. Denial of cross-examination by the Assessing Officer and CIT(A).

Detailed Analysis:

1. Reopening of the Case Under Section 148 of the Income Tax Act, 1961:
The assessee argued that the reopening of the assessment was incorrect as there was no escapement of income within the meaning of Section 147 of the Act. The Assessing Officer (AO) reopened the case based on information gathered during a survey conducted under Section 133A, which indicated that the trading liability had been converted into share application money. The Tribunal found that the reopening was justified as it was based on fresh tangible material and there was a nexus between the reasons recorded for reopening and the escapement of income. The Tribunal upheld the reopening of the assessment, citing the Supreme Court decisions in ACIT vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd. and Raymond Woollen Mills Ltd. vs. ITO.

2. Addition of ?15,15,00,000 as Cessation of Trading Liabilities Under Section 41(1) of the Income Tax Act, 1961:
The AO added ?15.15 crores to the assessee's income, arguing that the liability ceased to exist during the Assessment Year (AY) 2010-11 when the assessee allotted equity shares to creditors. The AO's conclusion was based on the survey findings, statements from the company’s director, and the fact that some creditors did not acknowledge the share application money or did not respond to notices.

The assessee contended that the liability ceased to exist in AY 2009-10 when it was converted into share application money. The Tribunal agreed with the assessee, stating that the liability was paid back in AY 2009-10 by converting it into share application money, and thus, it could not be considered as ceased during AY 2010-11. The Tribunal emphasized that the conditions for invoking Section 41(1) were not met, as the liability had already been settled in the previous year. The Tribunal directed the AO to delete the addition.

3. Denial of Cross-Examination:
The assessee argued that the AO and CIT(A) erred in not providing cross-examination opportunities. However, this issue was not elaborately discussed in the Tribunal's order, suggesting that it did not significantly impact the final decision.

Conclusion:
The Tribunal upheld the reopening of the assessment but ruled in favor of the assessee regarding the addition under Section 41(1), directing the AO to delete the ?15.15 crores addition. The Tribunal found that the liability had ceased to exist in AY 2009-10, not AY 2010-11, and the conditions for invoking Section 41(1) were not satisfied. The procedural aspect of the pronouncement of the order was also addressed, considering the nationwide lockdown due to the COVID-19 pandemic. The appeal was partly allowed.