2022 (5) TMI 672 - AT - Income Tax

Validity of reopening of assessment - assumption of jurisdiction by the Assessing Officer - Application of mind while recording satisfaction - no return of income was filed by the assessee for the year under consideration - bogus purchases - HELD THAT - As no return of income was filed by the assessee for the year under consideration. In third paragraph of reasons recorded also, the Ld. Assessing Officer emphasized that the assessee had not filed return of income for the year under consideration. In the last para, the Assessing Officer is referring to omission on the part of the assessee in filing the return of income. In our opinion, the word filing is missing in that sentence. Therefore, only on the basis of the fourth para to presume that he did not apply his mind while recording reasons, is not justified. The Assessing Officer has duly recorded the fact of non-filing of the return of income, not once but twice. Accordingly, we reject the contention of the Ld. Counsel of the assessee that AO has not applied mind, while recording reasons. In the instant case, assessment has been reopened in view of the information of bogus purchases by the assessee exceeding Rs. 80 lakh, and therefore it was not of the case that income escaped was below taxable limit. In view of the clear statement of income more than the taxable limit, the decision relied upon is distinguishable as GENERAL ELECTORAL TRUST VERSUS INCOME TAX OFFICER 20 (1) (2) , MUMBAI OTHERS 2016 (8) TMI 959 - BOMBAY HIGH COURT No reference of source of information for reopening the assessment except that information was available on record - According to the Ld. DR, said information was duly provided to the assessee by the Assessing Officer during the course of the assessment proceeding after filing return of income in response to notice under section 148 of the Act. However, the Ld. counsel has not produced any evidence to support that source of the information was asked from the Assessing Officer. It was the onus of the assessee to file necessary evidence in support of its claim that such information was asked from the Assessing Officer and he had not supplied. In absence of any such evidence before us, no adverse inference can be drawn against the Revenue. There was no requirement in the law for the Assessing Officer to presume that the assessee is an honest entity and will not enter into transactions of the accommodation entry. Further, deed to no return of income being on record, the Assessing Officer cannot presume that it was having huge bank loans or hundred percent tax exemption unit or a loss-making unit. These arguments of the Ld. counsel of the assessee are accordingly rejected. We are unable to find as when this letter was addressed to the Assessing Officer. More so, it does not appear from the said letter that assessee had asked for source of the information or copy of the material relied upon. Under the procedure laid down by the Hon ble Supreme Court in the case of GKN Drive Shafts (India) Limited 2002 (11) TMI 7 - SUPREME COURT the assessee can claim copy of reasons recorded after filing the return of income and the assessee had been duly provided copy of reasons recorded. Therefore, to presume that no material was available with the Ld. AO at the time of recording reasons is baseless. We reject the contention of the Ld. Counsel of the assessee challenging the jurisdiction of the Assessing Officer in issuing notice as well as completing the assessment. Plea that if addition on the issues other than the issues of reopening are not sustainable, if there is no addition on the issue of the reopening - In our opinion the contention of the Ld. counsel of the assessee that no addition has been made in respect of the basis on the which assessment was reopened, is not correct and therefore his request for considering the decision on the issue that no other addition could be made if the Assessing Officer has not made addition on the issue for which the assessment was reopened, is also rejected. Legality of the assessment on the ground that no notice under section 143(2) of the Act was issued - HELD THAT - DR filed copy of the notice under section 143(2) of the Act dated 10/03/2015 issued by the ITO Ward 8(3)(3) and notice dated 11/01/2016 issued by the ACIT - 8(3)(2). The Ld. DR has also filed report of the service of these notices. The Ld. counsel of the assessee could not controvert this factual finding of issue and service of the notice under section 143(2) of the Act. The ground has been filed by the assessee in very casual manner without verifying its records. The action of the assessee is highly deplorable. Therefore, the additional ground raised by the assessee is accordingly dismissed. Deduction under section 10AA - Whether income of the assessee is assessed into profit, the exemption under section 10AA of the Act should be allowed as assessee fulfilled the eligibility criteria for said exemption? - HELD THAT - In our opinion, if the assessee is otherwise eligible for deduction under section 10AA of the Act and fulfilling all the criteria as laid down in the relevant section, then there is no reason as why the assessee should be denied the deduction under section 10AA of the Act. If the income of the relevant unit is finally positive, then assessee may be considered for deduction under section 10AA if the assessee so satisfies the terms and conditions specified therein. The ground of the appeal of the assessee is accordingly allowed for statistical purposes. NP estimation - applying of net profit rate of 3% on the turnover by the Ld. CIT(A) as against the net profit rate of 5% applied by the Assessing Officer - plea of the assessee is that as per the data of the textile industry there was an average net loss of 4% on turnover across the textile industry - HELD THAT - The assessee has not provided any instances of other companies along with their asset base and turnover, which could form a basis for estimating the profit of the assessee for the year under consideration. The Ld. CIT(A) has observed that while estimating net profit rate at the 5% of turnover, the Assessing Officer as relied on the book result for assessment year 2007-08 and assessment year 2010-11 - we set aside the finding of the Ld. CIT(A) on the issue in dispute and uphold the finding of the Assessing Officer. Further, the direction of the Ld. CIT(A) to exclude the export incentives from the non-operative income is also not justified . The Assessing Officer has applied the net profit rate of assessment year 2010-11 worked out on the basis of audited accounts. If the said incentive has been separately considered as part of the non-operative income in assessment year 2010-11, same cannot be considered as part of book result for the year under consideration. Accordingly, we direct the Assessing Officer to examine the addition of export incentive as non-operative income on comparative book results for assessment year 2010-11. Accordingly, the ground No. two of the appeal of the assessee is dismissed, whereas solitary ground No. one of the appeal of the revenue is allowed. Interest payment received - HELD THAT - We are of the opinion that when the Assessing Officer has applied the book results for AY 2007-08 and 2010-11 for estimating the book results for the year under consideration, then treatment for the interest income has also to be given in the year under consideration, what has been given by the assessee in assessment year 2007-08 and 2010-11. Before us, the assessee has not substantiated that said interest income for assessment year 2010-11, was not part of business operations. In absence of any supporting evidence by the assessee, the action of the Ld. CIT(A) in directing to add the interest income from fixed deposit to the estimated profit from business operation is justified and accordingly upheld. The ground No. three and additional ground of the appeal are accordingly dismissed. Disallowance u/s 40(a)(ia) of the Act for non-deduction of tax at source on various expenditure incurred - HELD THAT - No disallowance under section 40(a)(ia) Act is called for when invoking section 145(3) of the Act net, profit rate has been applied for estimation of profit. The ground No. four of the appeal of assessee is accordingly allowed. Addition of loan outstanding held as unexplained - HELD THAT - We are of the opinion that as far as estimation of the income is concerned, the computation of the profit by the assessee has been rejected, which does not mean that entries of unsecured loan recorded in those books of accounts are of no relevance. The addition for unsecured loan is made in terms of section 68 of the Act where the assessee failed to explain source and nature of the credit in its books of accounts. The credit in books of accounts shown as received by way of unsecured loan are independent from estimation of profit from business operation. It is for the assessee to explain source of the said credit and in failure to do so, said credit is liable to be added under section 68 of the Act. We find that Tribunal Hyderabad Bench in the case of Smt. Shoba Gupta 2013 (8) TMI 756 - ITAT HYDERABAD has discussed this issue in detail and held that addition u/s 68 of the Act can be made along with estimation of income unless the assessee establish that unexplained cash credit was arising out of the profit of business of assessee.

Summary

Issues Involved:

1. Validity of the reassessment notice under Section 148 of the Income Tax Act.
2. Assumption of jurisdiction by the Assessing Officer.
3. Issuance of notice under Section 143(2) of the Income Tax Act.
4. Estimation of net profit rate and rejection of book results.
5. Disallowance under Section 40(a)(ia) for non-deduction of tax at source.
6. Addition of unexplained cash credits under Section 68.
7. Addition related to discrepancies in fixed assets.
8. Legality of the assessment order being passed under Section 143(3) read with Section 147 instead of Section 144.
9. Eligibility for exemption under Section 10AA.

Detailed Analysis:

1. Validity of the Reassessment Notice under Section 148:

The assessee challenged the notice issued under Section 148, arguing non-application of mind by the Assessing Officer (AO) and lack of clarity in the reasons recorded. The Tribunal found that the AO had clearly stated the reasons for reopening, including the assessee being a beneficiary of accommodation entries. The Tribunal rejected the contention of non-application of mind, noting that the AO had duly recorded the fact of non-filing of the return of income. The Tribunal also dismissed the argument that the AO did not verify the information before issuing the notice, stating that the AO could not have verified the transactions as no return was filed by the assessee.

2. Assumption of Jurisdiction by the Assessing Officer:

The assessee argued that the notice under Section 148 was issued by an officer who did not have jurisdiction, and subsequent assumption of jurisdiction by another officer was illegal. The Tribunal held that the jurisdiction was validly transferred within the same range officer and that the assessee did not challenge the jurisdiction within the prescribed limitation period under Section 124(3). The Tribunal rejected the contention of the assessee, following decisions from various High Courts that upheld the validity of such jurisdiction transfers.

3. Issuance of Notice under Section 143(2):

The assessee claimed that no notice under Section 143(2) was issued. The Tribunal found that notices under Section 143(2) were indeed issued and served, and the assessee could not provide evidence to the contrary. The Tribunal dismissed this ground, criticizing the assessee for raising it without verifying records.

4. Estimation of Net Profit Rate and Rejection of Book Results:

The AO rejected the book results due to discrepancies and estimated the net profit at 5% of the turnover. The CIT(A) reduced this to 3%, considering the textile industry's overall poor performance. The Tribunal found the CIT(A)'s acceptance of the unaudited book results contradictory and upheld the AO's estimation based on the subsequent year's results. The Tribunal also directed the AO to include export incentives as non-operative income, aligning with the treatment in the subsequent year.

5. Disallowance under Section 40(a)(ia) for Non-Deduction of Tax at Source:

The AO disallowed certain expenditures for non-deduction of tax at source. The Tribunal, following the Supreme Court's decision in M/s Pradeep Singh Wazir, held that no disallowance under Section 40(a)(ia) is warranted when income is estimated under Section 145(3). This ground was allowed in favor of the assessee.

6. Addition of Unexplained Cash Credits under Section 68:

The AO added unexplained cash credits as income under Section 68. The Tribunal upheld this addition, stating that the rejection of book results does not preclude the AO from making additions for unexplained credits. The Tribunal emphasized that the burden is on the assessee to explain the source and nature of such credits.

7. Addition Related to Discrepancies in Fixed Assets:

The AO added discrepancies in fixed assets to the income. The CIT(A) deleted this addition, noting that the assessee did not write off the difference in the unaudited accounts and claimed depreciation only on the opening WDV. The Tribunal upheld the CIT(A)'s decision, as the revenue did not challenge it.

8. Legality of the Assessment Order under Section 143(3) read with Section 147 instead of Section 144:

The assessee argued that the assessment should have been completed under Section 144. The Tribunal dismissed this ground, noting that the assessee participated in the assessment proceedings, and no evidence was provided to support the claim.

9. Eligibility for Exemption under Section 10AA:

The Tribunal allowed the assessee's claim for exemption under Section 10AA, provided the assessee meets the eligibility criteria. The Tribunal directed the AO to consider the exemption if the income of the relevant unit is positive and all conditions are satisfied.

Conclusion:

The appeal of the assessee was partly allowed, while the appeal of the Revenue was allowed. The Tribunal upheld the AO's estimation of net profit and addition of unexplained cash credits, while allowing the assessee's claim for exemption under Section 10AA and disallowing the addition under Section 40(a)(ia).