2009 (1) TMI 324 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the assessment order due to delayed service of notice u/s 143(2).
2. Legality of the initiation of proceedings u/s 148.
3. Addition of Rs. 1,86,047 under the interest by invoking provisions of s. 40A(2)(b).
4. Addition of Rs. 18,000 out of rent debited to P&L account.

Summary:

1. Validity of the assessment order due to delayed service of notice u/s 143(2):
The assessee argued that the assessment order dated 24th Jan., 2001, was void ab initio as the notice u/s 143(2) was served after the statutory period of twelve months. Initially, the Tribunal ruled in favor of the assessee, but the Finance Act, 2006, amended s. 148(1) with retrospective effect, stating that an assessment would not be quashed merely because the notice u/s 143(2) was served late. The Hon'ble Allahabad High Court directed the Tribunal to reconsider this issue in light of the amended provisions. The assessee did not press this ground, and it was decided against the assessee and rejected.

2. Legality of the initiation of proceedings u/s 148:
The AO reopened the assessment by issuing a notice u/s 148(1) on 8th May, 1998, citing excessive interest payments to family members of directors as the reason. The CIT(A) upheld the reopening, stating that the AO had reason to believe that income had escaped assessment. The assessee contended that the AO lacked material to form such a belief and that the reasons recorded were inadequate. The Tribunal found that the AO did not have sufficient information to infer that the interest payment was excessive and thus lacked jurisdiction to reopen the assessment. Consequently, the reassessment was quashed.

3. Addition of Rs. 1,86,047 under the interest by invoking provisions of s. 40A(2)(b):
The AO disallowed Rs. 1,86,047, considering the interest rate of 24% paid to family members as excessive and unreasonable compared to the market rate. The CIT(A) confirmed this disallowance. The assessee argued that the AO did not have any material to determine the fair market rate of interest and that similar payments were accepted in previous years. The Tribunal held that the AO failed to provide adequate evidence to justify the disallowance and lacked jurisdiction to make such an addition.

4. Addition of Rs. 18,000 out of rent debited to P&L account:
The AO disallowed Rs. 18,000 out of the rent paid, considering it above the agreed amount in the MoU. The CIT(A) upheld this disallowance. The assessee argued that the rent was increased as per a contractual agreement post-31st March, 1993. The Tribunal did not specifically address this issue in the final judgment due to the quashing of the reassessment proceedings.

Conclusion:
The Tribunal quashed the reassessment proceedings due to the lack of adequate reasons and material for reopening the assessment u/s 148. Consequently, the appeal filed by the assessee was allowed.