2008 (11) TMI 321 - AT - Income Tax

Summary

Issues Involved:
1. Reopening of the assessment under Section 147.
2. Disallowance of interest claimed by the assessee.
3. Disallowance of loss incurred in purchase and sale of cotton transactions.
4. Failure to summon certain parties under Section 131.
5. Levy of interest under Sections 234B and 234C.

Detailed Analysis:

1. Reopening of the Assessment under Section 147:
The first three grounds raised by the assessee relate to the reopening of the assessment. The assessee argued that the assumption of jurisdiction under Section 147 was bad in law due to lack of valid material to frame 'reason to believe,' and non-compliance with Section 148(2). The assessee filed its return for the assessment year 1996-97, which was processed under Section 143(1)(a), and later, the assessment was reopened by issuing a notice under Section 148. The reasons for reopening were the set-off of a loss from M/s Ganpati Synthetics and interest-free advances to partners. The assessee contended that the reasons were based on surmises and conjectures without any material basis.

The Tribunal, relying on the Supreme Court judgment in Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd., held that the reopening of the assessment was valid. The Supreme Court had clarified that 'reason to believe' does not require the AO to have finally ascertained the fact of escapement of income but only a cause or justification to know or suppose that income had escaped assessment.

2. Disallowance of Interest Claimed by the Assessee:
The assessee claimed interest of Rs. 5,93,664 paid to various parties, which was disallowed by the AO on the grounds that the assessee had given interest-free advances to its partners. The AO opined that instead of giving interest-free advances, the assessee could have cleared its loans and avoided the payment of interest. The CIT(A) confirmed this disallowance.

The assessee argued that it had received non-interest funds from M/s Ganpati Synthetics Ltd. and had not raised any interest-bearing loans in the assessment year under consideration. The Tribunal, however, held that the assessee had borrowed loans and paid interest while simultaneously giving interest-free advances to its partners, which was not justified. The Tribunal supported the disallowance, emphasizing that business funds should be used for business purposes and not diverted for non-business purposes.

3. Disallowance of Loss Incurred in Purchase and Sale of Cotton Transactions:
The assessee claimed a loss of Rs. 4,50,675 on trading of cotton bales, which was disallowed by the AO and confirmed by the CIT(A). The assessee argued that the transactions were carried out through 'Pucca Arhatia' on a delivery basis and were not speculative in nature.

The Tribunal rejected the assessee's contention, holding that the issue could be considered during reassessment proceedings. The Tribunal found that the assessee had not provided any evidence of taking delivery of the cotton bales from various suppliers, either by agents or by itself. The Tribunal concluded that the loss appeared to be more of a paper loss rather than a genuine trading loss and confirmed the disallowance.

4. Failure to Summon Certain Parties under Section 131:
The assessee raised a ground that the AO failed to summon under Section 131 the two Arhatias, M/s Prem Kumar Satish Kumar and M/s Suresh Kumar Surendra Kumar, to verify whether the transactions were made on a delivery basis. The Tribunal noted that this ground did not emanate from the order of the CIT(A) and, therefore, did not require any adjudication. The ground was dismissed.

5. Levy of Interest under Sections 234B and 234C:
The last ground of appeal related to the levy of interest under Sections 234B and 234C, which the Tribunal held as consequential and mandatory in nature. Therefore, this ground was dismissed.

Conclusion:
The appeal of the assessee was dismissed in its entirety, with the Tribunal upholding the reopening of the assessment, the disallowance of interest claimed, the disallowance of the loss on cotton transactions, and the levy of interest under Sections 234B and 234C.