2007 (5) TMI 271 - AT - Income Tax

Summary

Issues Involved:

1. Validity of reopening the case under Section 148 of the IT Act, 1961.
2. Disallowance of penalty imposed by Customs Department.
3. Deduction under Section 80HHC for counter sales to foreign tourists.
4. Various additions made by AO under reassessment proceedings under Section 147.

Detailed Analysis:

1. Validity of Reopening the Case under Section 148:

The assessee challenged the validity of the notice issued under Section 148, arguing that the payment of customs duty and penalty was a normal business event and not an escapement of income. The Tribunal found that the AO had valid reasons to reopen the assessment based on information from customs authorities about a penalty that was not an allowable expenditure. Thus, the AO was justified in reopening the assessment.

2. Disallowance of Penalty Imposed by Customs Department:

The AO disallowed Rs. 40,000 paid as a penalty to the Customs Department, considering it an illegal activity and not an allowable deduction. The CIT(A) upheld this disallowance, noting that the penalty was for evading customs duty, which is not permissible as a business expense. The Tribunal agreed, stating that disallowable expenditure incurred during business cannot be claimed as allowable merely because it was incurred in the course of business.

3. Deduction under Section 80HHC for Counter Sales to Foreign Tourists:

The AO disallowed the deduction under Section 80HHC for counter sales made to foreign tourists, treating them as not part of export turnover. The CIT(A) confirmed this disallowance, relying on a Tribunal decision. However, the Tribunal reversed this decision, noting that the assessee's case was covered by the Supreme Court's judgment, which allowed such deductions as the transactions involved customs clearance and payments were realized in foreign convertible exchange.

4. Various Additions Made by AO under Reassessment Proceedings under Section 147:

The Revenue argued that the AO could assess any income escaping assessment that came to notice during reassessment proceedings. The assessee contended that the AO's inquiries into other items were fishing inquiries not permitted under reassessment proceedings. The Tribunal held that the AO's jurisdiction in reassessment is confined to the income that escaped assessment as per the recorded reasons. The Tribunal found that the AO's additional inquiries were not justified as they were not related to the reasons for reopening the assessment.

Specific Additions Deleted by CIT(A):

- Trading Addition of Rs. 25,48,728: The AO's addition was based on the assessee's failure to maintain a stock register and a decline in GP rate. The CIT(A) deleted this addition, and the Tribunal upheld the deletion, noting that the AO's inquiries were beyond the scope of reassessment.

- Disallowance of Manufacturing Expenses (Rs. 1,79,250): The AO disallowed these expenses due to lack of proper explanation. The CIT(A) deleted the addition, and the Tribunal agreed, finding the AO's inquiries unjustified.

- Disallowance of Foreign Travel Expenses (Rs. 65,407): The AO disallowed these expenses due to lack of supporting vouchers. The CIT(A) deleted the addition, and the Tribunal upheld the deletion.

- Disallowance of Telephone and Telex Expenses (Rs. 23,090): The AO disallowed these expenses due to lack of proper explanation. The CIT(A) deleted the addition, and the Tribunal upheld the deletion.

- Disallowance of Travelling Expenses (Rs. 65,000): The AO disallowed these expenses due to lack of proper explanation. The CIT(A) deleted the addition, and the Tribunal upheld the deletion.

- Addition of Unexplained Deposits in Partner's Capital Account (Rs. 22,12,679): The AO treated these deposits as unexplained. The CIT(A) deleted the addition, and the Tribunal upheld the deletion.

Conclusion:

The Tribunal dismissed the assessee's grounds challenging the reopening of the case and the disallowance of the penalty. However, it allowed the assessee's claim for deduction under Section 80HHC for counter sales to foreign tourists. The Tribunal also dismissed the Revenue's grounds and upheld the CIT(A)'s deletion of various additions made by the AO under reassessment proceedings. The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed.