2022 (7) TMI 547 - AT - Income Tax

Reopening of assessment u/s 147 - Eligibility of reasons to believe - review v/s reopening - unexplained investment u/s 69 - HELD THAT - Under the Explanation in section 147 of the Act, the AO was empowered to assess or reassess income in respect of any issue which comes to his notice subsequently in the course of proceedings under this section, notwithstanding that the reason for such issue has not been included in the reasons recorded under subsection (2) of section 148 of the Act. Thus, Explanation 3 makes it clear that AO may assess or reassess the income in respect of issues which have escaped assessment, if such issues come to his notice in the course of proceedings under this Section even though the said issues did not find mention in the reasons recorded and the notice issued u/s 148. In the present case on perusal of the reasons, we note that the proceedings were initiated on account of escapement of income from the business of shipping agency carried on by the assessee under the name and style of M/s Prime Corporation. However, the AO during the assessment proceedings has also made the addition on account of unexplained investment under the provisions of section 69 - The reason of making the addition was based on the proceedings before the ADIT (Inv) as mentioned in the assessment order. A perusal of the above proceedings before the ADIT investigation reveals that addition of unexplained investment relates to the share trading activities carried out by the assessee through its bank i.e. Axis Bank and Religare Financial Services. It is undisputed fact that there was no mentioned about the share trading activity in the reasons recorded by the AO under the provisions of section 147 which is evident from the preceding paragraph. But the law provides the authority to the AO to make the addition of any other income which comes to his knowledge subsequently in the course of assessment proceedings. Whether the loss claimed by the assessee with respect to share trading business can be allowed as deduction against the escaped income as discussed above? - We find that the assessee is entitled to claim the deduction of the expenditures in respect of which the escaped income has sought to be assessed. The loss from the share trading activity has direct nexuses with respect to the unexplained investments which has been added by the AO under the provisions of section 69 - Accordingly we hold that the assessee is entitled for the deduction with respect to the loss claimed by the assessee from the share trading activities. We also note that there was single bank account which was used for the purpose of the share trading activities as well as for shipping business activities. As such the income generated by the assessee from the share trading activities was diverted to the business of shipping. The common fund was used for generating both the incomes out of the single bank account. Therefore we find difficult to hold that the activities being share trading and shipping business are distinct and not interconnected in the given facts and circumstances. There is also no dispute to the fact that the assessee in the original return of income filed under section 139 of the Act has only disclosed income from the salary. Thus, it is not the case of the assessee that the impugned share trading loss relates to the original return of income of the assessee. As such, the share trading loss was never subject matter of dispute or discussion in the original return of income. Accordingly, the principles laid down in the case of M/s Sun engineering 1992 (9) TMI 1 - SUPREME COURT , in our humble understanding, are not applicable in the given facts and circumstances for the reasons elaborated hereinabove. Quantification of the loss from the share trading activities - It has been alleged by the revenue that the loss from the share trading activity has been computed under the provisions of section 44AF of the Act. Admittedly, there s no possibility of showing any loss from the share trading activities under the provisions of section 44 AF of the Act. However, we note that the assessee has not claimed any loss under section 44AF of the Act. As such there is a separate trading and profit loss account placed on page 29 of the paper book. Thus we disagree with the finding of the authorities below that impugned loss was computed under the provision of section 44AF of the Act. Hence, the ground of appeal of the assessee is allowed. Undisclosed investment - The addition was made by the AO on account of the undisclosed investments based on wrong assumption of facts. According to the learned AR there was the sale proceeds of Rs. 4,85,95,023.00 out of which a sum of ₹ 1,03,50,000.00 was disclosed but no inference can be drawn that the cash available with the assessee was only of Rs. 1,03,50,000.00 only. The contention of the learned AR was not disproved by the DR appearing on behalf of the revenue. Thus, we hold that investment was made by the assessee out of the gross receipts shown by him from the activity of share trading. Accordingly, we are of the view that no addition in the given facts and circumstances is warranted. Hence, we set aside the finding of the learned CIT-A and direct the AO to delete the addition made by him. Thus the ground of appeal of the assessee is allowed. Addition on account of difference in opening balance and closing balance of the share - As per the accounting practice, the closing stock of the shares as on the last day of the previous year is carried forward to the year under consideration which is shown as opening balance. Against such opening balance, the assessee makes the sale of the shares and the net effect is accounted as income/ loss in the books of accounts which is accepted accounting practice. If such practice is not followed to carry forward opening balance, then the amount of sales of the items appearing in the opening stock will result as gross income in the hands of the assessee which would not reflect the true income of the assessee. The income is determined after reducing the cost of acquisition from the sales price. As such the opening stock reflects the cost of acquisition which is adjusted against the price of the sales. If it is not done, the income chargeable to tax under the provisions of law cannot be determined. Thus we hold that assessee has not claimed any expense of ₹ 21 lakhs which is reflecting the difference in the opening and closing stock as alleged by the authorities below. Accordingly, we set aside the finding of the learned CIT-A and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

Summary

Issues Involved:
1. Validity of reopening of assessment under Section 148 of the Income Tax Act, 1961.
2. Disallowance of loss on share trading.
3. Charging of interest under Sections 234A, 234B, 234C, and 234D.
4. Addition of unexplained investment under Section 69.
5. Enhancement of income without providing an opportunity as per Section 251(2).

Detailed Analysis:

1. Validity of Reopening of Assessment under Section 148:
The assessee challenged the reopening of assessment under Section 148. However, no arguments were advanced by the assessee's counsel during the hearing, leading to the dismissal of this ground.

2. Disallowance of Loss on Share Trading:
The primary issue revolves around whether the loss from share trading can be set off against the income from the shipping business. The assessee argued that the loss was determinable from bank accounts found during a survey operation and should be considered while calculating total income. The AO disallowed the claim, reasoning that the reassessment was for the shipping business, and the share trading loss was unconnected.

The CIT(A) upheld the AO's decision, referencing the Supreme Court's ruling in CIT vs. Sun Engineering Works (P) Ltd. and other similar cases, which preclude claims not made in the original return from being raised in reassessment proceedings unless related to escaped income.

The ITAT, however, found that the loss from share trading had a direct nexus with the unexplained investments added by the AO under Section 69. It held that the assessee is entitled to claim deductions for expenditures related to the escaped income. The ITAT also noted that the assessee used a single bank account for both share trading and shipping business, making it difficult to separate the activities. Consequently, the ITAT allowed the appeal, permitting the set-off of the share trading loss against the shipping business income.

3. Charging of Interest under Sections 234A, 234B, 234C, and 234D:
The issues raised regarding the charging of interest were either consequential or general in nature and were dismissed as not pressed.

4. Addition of Unexplained Investment under Section 69:
For the assessment year 2011-12, the AO added ?5,83,333 as unexplained investment under Section 69, which was part of a total unexplained investment of ?17,50,000 spread over three years. The CIT(A) enhanced the addition to ?17,50,000 for the year 2011-12, deleting the additions for the other years.

The ITAT found that the CIT(A) enhanced the income without providing an opportunity to the assessee, violating Section 251(2). It also noted that the gross receipts from the shipping business were sufficient to cover the investments, and thus, no addition was warranted. The ITAT directed the AO to delete the addition, allowing the assessee's appeal.

5. Enhancement of Income without Opportunity under Section 251(2):
The CIT(A) enhanced the income for the assessment year 2011-12 without providing the assessee an opportunity to be heard, violating Section 251(2). The ITAT held that such enhancement was not warranted and directed the deletion of the additional amount added by the CIT(A).

Conclusion:
The ITAT allowed all the appeals filed by the assessee, directing the deletion of disallowed losses and unexplained investments, and emphasized the necessity of providing an opportunity to the assessee before enhancing income. The judgment underscores the principles of fair assessment and adherence to procedural requirements in reassessment proceedings.