2021 (11) TMI 528 - AT - Income Tax

Reopening of assessment u/s 147 - bogus purchases - HELD THAT - To initiate reopening of the assessment, the Ld. AO must have 'reason to believe that income chargeable to tax has escaped assessment. Such reason to believe must be based on some material coming to the possession of the Ld. Assessing Officer which may trigger reason to suspect. It must be kept in mind that the reason to believe must have a rational connection with or relevant bearing on the formation of the belief, i.e, there must be direct nexus or link between the material and the formation of such belief. Since in the instant case, the issues/items for which the AO has reopened the assessment are ambiguous and vague, as the amount mentioned in the reasons recorded is uncertain and the assessing officer does not know that how much income of the assessee has escaped assessment. AO having not carried out the scrutiny assessment within the prescribed statutory limit, cannot be given another innings for no fault of the assessee and therefore in the facts and circumstances of the case, we are of the considered opinion that reason to believe which is the jurisdictional precondition to reopen the assessment as required by the law has not met in the reasons recorded in the instant case and therefore the action of the AO to reopen the assessment is null in the eyes of law and hence we are inclined to quash the initiation of reassessment proceedings being ab-initio void. Addition of non-charging of interest on business advances made to suppliers - Proof of sufficiency of own funds - HELD THAT - As own interest free funds of the assessee is to the tune of ₹ 2,18,18,572/- whereas the assessee has advanced the interest free loan to the tune of ₹ 63,22,457/-, which is less than the own free funds, therefore, based on this factual position, no disallowance on account of interest free advance should be made and hence we delete the addition. Ad-hoc addition on account of office expenses - Estimation only after rejecting the books of accounts of the assessee u/s 145(3) and thereafter by best judgment assessment u/s 144 - HELD THAT - Here in this case, the AO has not passed any order u/s 144 of the Act. The AO thus without rejecting the books of account of the assessee has gone for estimation on suspicion and conjectures that the assessee may be inflating its expenses. While scrutinizing the expenditure if the expenses claimed are not having any nexus to the business of the assessee or if there is deficiency in the vouchers or there is no bills supporting the incurrence of an expenditure, at the most, expenses to the extent that are not supported by the vouchers can be held to be non-genuine and can be disallowed by the AO; and item-wise the AO could have disallowed the expenditure rather than going for ad hoc disallowance of percentage basis of the expenses claimed by the assessee which action of the AO is arbitrary in nature and cannot be sustained. Hence we delete the ad-hoc addition

Issues Involved:
1. Condone the delay in filing appeals for AY 2007-08 and 2008-09.
2. Validity of reopening of assessment under section 147/148 of the Income Tax Act.
3. Addition of unverifiable purchases for AY 2007-08 and 2008-09.
4. Addition on account of non-charging of interest on business advances for AY 2013-14.
5. Ad-hoc addition on account of office and telephone expenses for AY 2013-14.

Detailed Analysis:

1. Condone the Delay in Filing Appeals for AY 2007-08 and 2008-09:
The appeals filed by the assessee for AY 2007-08 and 2008-09 were barred by limitation by 84 days. The assessee submitted a petition requesting to condone the delay, stating that the order of Ld. CIT(A) was not received on time. The Tribunal, having regard to the reasons given, condoned the delay and admitted the appeals for hearing.

2. Validity of Reopening of Assessment under Section 147/148:
The assessee challenged the validity of reopening of assessment under section 147 of the Act. The Tribunal noted that the assessee did not raise objections against the reasons recorded u/s 147 during the assessment proceedings and raised the issue for the first time before the Tribunal. The Tribunal admitted the additional ground, citing the Hon'ble Supreme Court's decision in National Thermal Power Company Ltd. vs. CIT, which allows raising purely legal issues if all facts are on record.

The Tribunal examined the reasons recorded by the Assessing Officer (AO) and found them to be ambiguous and lacking definite amounts of income that escaped assessment. The AO mentioned two sums, ?8,50,500 and ?1,67,78,359, without clarity on how much income had escaped assessment. The Tribunal held that the reasons recorded did not meet the conditions laid down in section 147, which require material for the belief, honest reasons, and a nexus between material and belief. Consequently, the Tribunal quashed the reassessment proceedings for AY 2007-08 and 2008-09 as invalid.

3. Addition of Unverifiable Purchases for AY 2007-08 and 2008-09:
The AO made additions for unverifiable purchases, disallowing 25% of the total unverifiable purchases. The Tribunal, having quashed the reassessment proceedings, rendered the issue of additions on merits academic and infructuous.

4. Addition on Account of Non-Charging of Interest on Business Advances for AY 2013-14:
The AO added ?1,25,400 on account of non-charging of interest on business advances given to Priya Impex Pvt. Ltd. and Amarshi Narola. The assessee argued that it had sufficient own interest-free funds to advance as interest-free loans. The Tribunal found merit in the assessee's submission, noting that the assessee's own interest-free funds were more than the interest-free advances. Therefore, the Tribunal deleted the addition of ?1,25,400.

5. Ad-hoc Addition on Account of Office and Telephone Expenses for AY 2013-14:
The AO made an ad-hoc addition of ?38,951 on account of office and telephone expenses. The Tribunal noted that these were miscellaneous expenses like cold drinks, tea, and coffee, and considering the assessee's turnover of ?23,05,65,651, these expenses were wholly and exclusively for business purposes. The Tribunal held that the AO could not make an ad-hoc disallowance without rejecting the books of accounts under section 145(3) and making a best judgment assessment under section 144. Therefore, the Tribunal deleted the ad-hoc addition of ?38,951.

Conclusion:
The Tribunal allowed the appeals for AY 2007-08 and 2008-09, quashing the reassessment proceedings as invalid. For AY 2013-14, the Tribunal deleted the additions on account of non-charging of interest on business advances and ad-hoc office and telephone expenses, allowing the appeal.

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