2008 (6) TMI 285 - AT - Income Tax

Validity of reopening of assessment u/s 147 - Additions u/s. 68 - chit fund contributions - non-furnishing of reason for reopening the assessment - Contributions to chit are in the nature of deposit or investment within the meaning of s. 13(1)(d) r/w s. 11(5) of the Act? Validity of reopening of assessment u/s 147 - Additions u/s. 68 - chit fund contributions - non-furnishing of reason for reopening the assessment - AO, in all the three years, has made the addition u/s. 68 on cash credits - without furnishing the details of such cash credits - CIT(A) deleted the said addition, that the AO has failed to make proper enquiries - HELD THAT - We find from the assessment order that during the course of proceedings for granting recognition u/s. 80G of the Act, the Department has noticed the chit fund contributions and according to the Department, these deposits have been made in contravention of provisions of s. 11(5) of the Act. Consequent to the abovesaid information, the AO reopened the assessments - When the question is raised about the validity of reassessment notice, it is only to be seen whether there are reasonable grounds with the AO to initiate the proceedings of reopening of assessment and not whether the omission or failure and escapement of income is established. This view is supported by the decision of Hon'ble Supreme Court in Sri Krishna (P) Ltd. Etc. vs. ITO 1996 (7) TMI 2 - SUPREME COURT . The letter issued by the AO also addresses upon certain objections raised by the assessee with regard to applicability of s. 11(5). However, the moot point here is that the assessee has not raised any objection to tile reopening, after furnishing the reasons letter, though a new ground has been raised before us. On a conspectus of the matter, we hold that the reopening of assessments u/s 147 of the Act is in accordance with the law and hence, the assessee fails on this issue. Contributions to chit are not in the nature of deposit or investment within the meaning of s. 13(1)(d) r/w s. 11(5) of the Act - main contention of the ld AR is that the contribution to chit fund cannot be regarded as either an investment or deposit and hence the provisions of s. 11 (5) would not be applicable - HELD THAT - The undisputed fact is that the chit fund scheme also constitutes a convenient instrument for savings. If one bids at the fag end of the chit period, it may result in a gain. In that case this instrument can be termed as income producing property and hence contributions to chit fund, in that case, will fall under the category of investment - the contributions made to chit fund scheme of Model Chit Fund Corporation are an investment and since this investment is not in the form or mode prescribed u/s. 11(5) of the Act, the provision of s. 13(1)(d) is attracted. Hence, we do not find any infirmity in the orders of learned CIT(A) - We find from the record that the AO has initially issued commissions to the ITOs located at Kakinada, Vizianagaram and Srikakulam. However, only the ITO, Kakinada, responded to the commission and sent the sworn statements recorded from some of the creditors. Subsequently, the AO issued summons to the assessee asking it to produce all the creditors. However, the assessee expressed its inability to produce all the creditors. Finally the AO made additions u/s. 68 without making further enquiries and without furnishing the details of such cash credits - From the assessment order we find that the AO has rejected the confirmation letter furnished by four creditors on surmises only. The AO should have listed out the cash credits on which he wanted details and then sought for the information from the assessee. Without affording such details to the assessee, the assessee cannot be expected to discharge the initial burden of proof placed upon it. Hence, we do not find any reason to interfere with the order of learned CIT(A) on this issue also. In the result, the appeals filed by the assessee as well as Revenue are dismissed.

Summary

Issues Involved:
1. Validity of reopening of assessment under Section 147 of the IT Act.
2. Nature of contributions to chit funds vis-`a-vis Section 13(1)(d) read with Section 11(5) of the IT Act.
3. Deletion of additions made under Section 68 of the IT Act by the CIT(A).

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment under Section 147 of the IT Act:
The assessee challenged the reopening of assessments on multiple grounds:
(i) The AO did not furnish the reasons recorded for reopening, violating natural justice.
(ii) There was no accumulated income, thus reopening on the ground of violation of Section 11(5) was unsustainable.
(iii) The AO lacked the requisite belief regarding the escapement of income at the initiation of proceedings.
(iv) The AO did not reference Section 13(1)(d) in the assessment order, questioning the validity of reopening.

The Tribunal found that the assessee did not request the exact file notings but sought details like the nature and quantum of income. The AO's detailed letter dated 10th March 2004 was considered sufficient, and there was no variation between the file notings and the letter. The Tribunal held that the AO had supplied the reasons as required by law, rejecting the assessee's ground.

The Tribunal also clarified that Section 11(5) applies to all funds, not just accumulated ones. The AO's reference to Section 11(5) without mentioning Section 13(1)(d) did not invalidate the proceedings. The Tribunal upheld the reopening of assessments, noting that the AO had reasonable grounds based on the Kerala High Court's judgment and the provisions of Section 292B.

2. Nature of Contributions to Chit Funds:
The assessee argued that contributions to chit funds do not constitute deposits or investments under Section 13(1)(d) read with Section 11(5). The Tribunal noted that chit funds combine savings and borrowings. The assessee's continuous contributions for three years indicated an investment intent rather than borrowing. The Tribunal observed that the assessee accounted for dividends as income, demonstrating that the contributions yielded income.

The Tribunal held that the contributions to the chit fund scheme were investments. Since these investments were not in the prescribed modes under Section 11(5), the provisions of Section 13(1)(d) were attracted. The Tribunal upheld the CIT(A)'s order, finding no infirmity.

3. Deletion of Additions Made under Section 68:
The Department contested the deletion of additions under Section 68 by the CIT(A). The AO had made additions without furnishing details of the cash credits. The Tribunal noted that the AO issued commissions to various ITOs, but only one responded. The AO's approach was deemed half-hearted, as he did not provide specific details of the cash credits to the assessee.

The Tribunal emphasized that the burden of proof initially lies with the assessee, but once discharged, it shifts to the AO. The AO failed to list the specific cash credits and rejected confirmation letters on surmises. The Tribunal found no reason to interfere with the CIT(A)'s order, agreeing that the AO did not conduct proper enquiries.

Conclusion:
The Tribunal dismissed the appeals filed by both the assessee and the Revenue, upholding the orders of the CIT(A) on all issues. The reopening of assessments was deemed valid, contributions to chit funds were considered investments attracting Section 13(1)(d), and the deletion of additions under Section 68 was justified due to the AO's inadequate enquiries.