2022 (9) TMI 963 - AT - Income Tax

Reopening of assessment u/s 147 - unexplained property purchased - Reopening on the basis of investigation carried out by the Investigation Wing concluding that there was no transfer of property within the meaning of section 2(47) (v) nor was there any transfer of property within the meaning of section 53A of the Transfer of Property Act - proper registration has not been taken place before the relevant authorities of the State Government - HELD THAT - In this case, it is an undisputed fact that assessee purchased a flat in residential colony and in assessment order, learned AO himself has mentioned that assessee is having business of Financing services and is a Private Limited Company. In this case, AO received an information from the Investigation Wing that a so called purchase of property by the assessee was purely sham transaction and the loss claimed by the assessee on the sake of the said property on a later date was an artificial loss created by the assessee in its books of account to take the advantage of set off of loss against the income earned by the assessee. But nowhere AO has applied his own mind before issuing notice and to arrive at conclusion that assessee has escaped an income and on the basis of report submitted by the Investigation Wing, AO issued notice purely on borrowed satisfaction. In our considered opinion, in such case addition cannot be made. Appeal filed by the Assessee is partly allowed. Disallowance u/s 14A - Assessee has not submitted any evidence regarding sources and applications in support of its contention that there is a direct nexus between utilization of interest free funds and investigation made by it. In our considered opinion, disallowance under S. 14A r.w. Rule 8D was correctly worked out. The assessee has not disallowed any expenditure for earning exempt income in P L account, which does not form part of total income. Further, the assessee has paid interest of Rs.2,36,887/- and assessee has made average investment of Rs.63,85,900/- and having average assets of Rs.2,00,64,030/-. In our considered opinion, learned AO has rightly made disallowance under S.14A r.w. Rule 8D. In view of the above, we concur the decision of the lower authorities and dismiss this ground of appeal.

Summary

Issues Involved:
1. Validity of reopening assessment under section 147 of the Income Tax Act.
2. Disallowance of loss on sale of property.
3. Disallowance under section 14A read with Rule 8D.

Issue 1: Validity of Reopening Assessment:
The appeal was against the Commissioner of Income Tax (Appeals) upholding the action of the Assessing Officer in issuing a notice under section 148 and making consequential reassessment under section 147 for Assessment Year 2010-11. The appellant contended that the reasons recorded for reopening were not in accordance with section 148(2) and there was no escapement of income under section 147. The reopening was based on the Investigation Wing's conclusion that a property transaction did not constitute a transfer as per the relevant provisions. The appellant objected to the reopening, but the Assessing Officer proceeded with the reassessment. The Tribunal found that the Assessing Officer did not apply his own mind and issued the notice based on borrowed satisfaction, leading to the conclusion that the addition made was unjustified.

Issue 2: Disallowance of Loss on Sale of Property:
The Assessing Officer disallowed a loss of Rs. 34,00,000 incurred in a property transaction between the appellant and another party, considering it a sham and bogus transaction. The Commissioner of Income Tax (Appeals) confirmed this action, stating that the transaction was not genuine. The Tribunal noted that the Assessing Officer did not verify the facts independently and solely relied on the Investigation Wing's report. The Tribunal held that in the absence of the Assessing Officer's independent assessment and the issuance of the notice based on borrowed satisfaction, the addition of the loss could not be justified.

Issue 3: Disallowance under Section 14A read with Rule 8D:
Regarding the disallowance under Section 14A read with Rule 8D, the Assessing Officer made an addition on dividend income and disallowed Rs. 1,14,869. The appellant did not provide evidence linking interest-free funds to the investigation. The Tribunal found that the disallowance under Rule 8D was correctly worked out, as the appellant did not disallow any expenditure for earning exempt income. The Tribunal upheld the decision of the lower authorities on this ground, as the appellant failed to establish a direct nexus between the utilization of funds and the investigation.

The Tribunal partially allowed the appeal, emphasizing that the Assessing Officer's failure to independently assess the situation and the issuance of the notice based on borrowed satisfaction rendered the additions unjustified. The judgment highlighted the importance of the Assessing Officer's independent evaluation before making additions in reassessment cases.