2023 (11) TMI 1329 - AT - Income Tax

Validity of reopening of assessment - Reason to believe - HELD THAT - Sufficiency of the correctness of the material is nothing to be considered as to this stage of the recording reasons for the reopening of the assessment proceedings in the case of the appellant assessee. AO has valid reasons to form belief u/s 147 of the Act to complete assessment order u/s 147 r.w.s. 143(3) of the Act following the due procedure. Assessment against non existing person - MGB Gramin Bank seized to exist at the time framing the assessment - The issue is squarely covered by the co-ordinate bench decision in own case wherein on identical facts, appeal of the assessee was dismissed by the Hon ble ITAT. CIT (A) following the co-ordinate bench decision in assessee s own case has rejected the issue of validity of assessment alleged to be framed on a non existing person on account of merger of Bank. In our view, the ld. CIT (A) has rightly rejected the grounds of assessee pertaining to the issuance of notice u/s 148 of the Act and framing assessment in the name of MGB Gramin Bank. Disallowance of provision for wage revision of workman - As argued payment were made in F.Y. 2010-11 and that neither the quantum for provision of wage revision had been finalized nor any kind of payment was made till the end of the F.Y. 2009-10 - HELD THAT - The very purpose of the creating a provision and allowing such a provision is for such eventualities only. Therefore, in the present case, it cannot be denied that the effective date of wage revision resulting into creation of liability to be paid, was well known and; the progress of negotiations between the workmen and the management were well underway, culminating into major payment of arrears in Sept. 2010 i.e. in the following year. No infirmity or perversity in the finding of the CIT (A) in deleting the disallowance of provision for wage revision of workman. Thus, the grounds of appeal of the department are rejected.

Summary

1. ISSUES PRESENTED and CONSIDERED

The following core legal questions were considered in this judgment:

• Whether the reassessment proceedings initiated under section 147/148 were valid, given the alleged absence of a reasonable belief of income escapement.
• Whether the assessment order framed in the name of a non-existent entity, MGB Gramin Bank, post-amalgamation, is void ab initio.
• Whether the disallowance of provisions for standard assets under section 36(1)(viia) was justified.
• Whether the disallowance under section 14A for expenses related to exempt income was correctly sustained.
• Whether the deletion of disallowance for wage revision provisions was appropriate.
• Whether the appellant was entitled to a deduction under section 80P of the Income Tax Act.

2. ISSUE-WISE DETAILED ANALYSIS

Reassessment Proceedings Validity:

• Legal Framework: Section 147 allows reassessment if the AO has reason to believe that income has escaped assessment. This belief must be based on tangible material.
• Court's Interpretation: The court held that the AO had valid reasons to believe income had escaped assessment, as the reasons were communicated to the appellant.
• Key Evidence: The AO's reasons for reopening were based on provisions for standard assets and depreciation on investments not being allowable.
• Application of Law: The court found no infirmity in the AO's belief under section 147.
• Conclusion: The reassessment proceedings were upheld as valid.

Assessment Order in Name of Non-Existent Entity:

• Legal Framework: An assessment order must be framed in the name of a legal entity.
• Court's Interpretation: The court referred to a previous decision where the issue of validity of assessment on a non-existent entity was dismissed.
• Conclusion: The assessment order was upheld as valid despite the entity's non-existence at the time of assessment.

Disallowance of Provisions for Standard Assets:

• Legal Framework: Section 36(1)(viia) allows deductions for provisions for bad and doubtful debts, not for standard assets.
• Court's Interpretation: The court observed that provisions for standard assets do not qualify as bad debts and thus are not deductible.
• Key Evidence: The appellant's reliance on RBI guidelines was noted, but the court emphasized the tax treatment under the Income Tax Act.
• Conclusion: The disallowance was sustained.

Disallowance under Section 14A:

• Legal Framework: Section 14A disallows expenses incurred in relation to exempt income.
• Court's Interpretation: The court restored the issue to the AO for fresh adjudication, noting the need for precise expense allocation.
• Conclusion: The issue was remanded for further examination.

Deletion of Disallowance for Wage Revision Provisions:

• Legal Framework: Provisions are recognized when there is a present obligation, probable outflow of resources, and a reliable estimate.
• Court's Interpretation: The court found that the wage revision was an ascertained liability, with negotiations underway and payments made subsequently.
• Conclusion: The deletion of disallowance was upheld.

Deduction under Section 80P:

• Legal Framework: Section 80P provides deductions for cooperative societies, not applicable to banks.
• Court's Interpretation: The court ruled that the appellant, being a Gramin Bank, was not eligible for the deduction.
• Conclusion: The claim for deduction was dismissed.

3. SIGNIFICANT HOLDINGS

• Reassessment Validity: "The AO had valid reasons to form belief under section 147 of the Act to complete assessment order u/s 147 r.w.s. 143(3)." The sufficiency of material is not to be considered at the stage of recording reasons.
• Assessment on Non-Existent Entity: The court upheld the assessment's validity, following precedent that dismissed similar challenges.
• Standard Assets Provision: "Provisions for 'Standard Assets' which otherwise are not allowable as deduction because the same cannot be termed as bad & doubtful debts." The court emphasized adherence to the Income Tax Act over RBI guidelines.
• Wage Revision Provisions: "The effective date of wage revision resulting into creation of liability to be paid, was well known." The court recognized the provision's validity due to the ascertained liability.
• Section 80P Deduction: The court concluded that the appellant, as a Gramin Bank, was not eligible for the deduction under section 80P.

The judgment comprehensively addressed each issue, affirming the validity of the reassessment proceedings and the assessment order, while upholding the disallowances related to standard assets and section 14A, and confirming the deletion of disallowance for wage revision provisions. The claim for a deduction under section 80P was denied, aligning with the statutory framework and judicial precedents.