2012 (7) TMI 341 - AT - Income Tax

Challenging the re opening of assessment u/s 147 - Held that - The AO received information from investigation wing that assessment is a beneficiary of the bogus accommodation purchase bills and on this information, AO applied his mind and formed a belief that income has escaped assessment - it was neither a change of opinion nor it conveyed a particular interpretation of a specific provision which was done in a particular manner in the original assessment, the reason to believe has been appropriately understood by the Assessing Officer - was sufficient material on the basis of which notice was issued - against assessee. Against the deletion of addition made on account of bogus purchases by CIT(A) - Held that - Not getting the accounts audited as per the provisions of section 44AB even when the turnover exceeds the limit also solidify the belief that transactions were not genuine - CIT (A) observation that no sales can be executed without making corresponding purchases is perverse as during financial year 1999-00 and 2000-01, the installed capacity for Atta shown in accounts is 60,000 MTs while production was 73,149 MTs and 84,316 MTs respectively. Assessee was also getting grinding done on lease contract also. All these facts show that there cannot be a direct nexus between purchases and sales - in favour of assessee. Against the deletion of addition made on account of employees provided fund and ESIC by CIT(A)- Held that - The deduction of payment of employees contribution towards provident fund and ESI cannot be disallowed under section 43B, if paid before the due date of filing the return - in favour of assessee. Against the deletion of addition of interest free loan given to sister concern of assessee by CIT(A) - assessee also gave interest-free loans and advances to its sister-concerns - Held that - Revenue was not able to establish any nexus between the amount borrowed by the assessee company on interest and the amounts advanced by the assessee to its sister-concerns. In fact major parties from whom interest was not charged were the same as in assessment year 1977-78 for which the Tribunal held that there was no warrant for adding any notional or deemed interest - to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern should be allowed as a deduction under section 36(1) (iii), one has to enquire whether the loan was given by the assessee as a measure of commercial expediency - in favour of assessee.

Issues Involved:
1. Validity of reopening of assessment under Section 147 of the Income Tax Act, 1961.
2. Deletion of additions on account of bogus purchases.
3. Deletion of additions on account of belated payment of employees' contribution to EPF and ESIC.
4. Deletion of additions on account of interest-free loans given to sister concerns.

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment under Section 147:
The assessee argued that the reopening of assessment under Section 147 was invalid because there was no tangible material or formation of belief that income had escaped assessment. They contended that the notice under Section 148 was issued without jurisdiction and was based on mere suspicion rather than concrete evidence. The assessee relied on several judicial precedents, including decisions from the Hon'ble Delhi High Court and the Supreme Court, to support their argument that the reasons to suspect are not the same as reasons to believe.

On the other hand, the revenue argued that the Assessing Officer had received specific information from the investigation wing indicating that the assessee had received accommodation entries for bogus purchase bills. This information led the Assessing Officer to reasonably believe that income had escaped assessment. The revenue cited the Supreme Court's decision in ACIT vs. Rajesh Jhaveri Stock Brokers P. Ltd., which held that the material required for reopening does not need to conclusively prove the escapement of income.

The Tribunal concluded that the Assessing Officer had rightly assumed jurisdiction for initiating proceedings based on specific information received from the Directorate of Investigation. The Tribunal found that there was a rational connection between the information received and the belief that income had escaped assessment. Therefore, the plea of the assessee regarding the invalidity of the reopening was dismissed.

2. Deletion of Additions on Account of Bogus Purchases:
The revenue challenged the deletion of additions made on account of bogus purchases from M/s. N.K. Trading Co. The revenue argued that the CIT (A) had erred in holding that even if the purchases were bogus, the sales as per the books of account were accepted, and thus, the purchases could not be entirely disallowed. The revenue contended that there was no direct link between the purchases and sales, and the findings of the CIT (A) were based on hypothetical presumptions.

The assessee argued that they were not provided an opportunity to cross-examine the proprietor of N.K. Trading Co. and relied on various judicial decisions to support their claim.

The Tribunal found that the assessee was provided an opportunity to cross-examine the proprietor of N.K. Trading Co., but they failed to produce any documentary evidence to prove the genuineness of the purchases. The Tribunal noted that the purchases were small in comparison to the total purchases and that there was no direct nexus between the purchases and sales. Therefore, the Tribunal set aside the order of the CIT (A) and allowed the revenue's appeal on this issue.

3. Deletion of Additions on Account of Belated Payment of Employees' Contribution to EPF and ESIC:
The revenue challenged the deletion of additions made on account of belated payment of employees' contribution to EPF and ESIC. The Tribunal noted that the payments were made within the grace period permitted under the Provident Fund Act and ESI Act. The Tribunal relied on the decision of the Hon'ble jurisdictional High Court in CIT vs. AIMIL Ltd. and the Supreme Court's decision in CIT vs. Vinay Cements Limited, which held that the deduction cannot be disallowed under Section 43B if the payment is made before the due date of filing the return. Therefore, the Tribunal dismissed the revenue's appeal on this issue.

4. Deletion of Additions on Account of Interest-Free Loans Given to Sister Concerns:
The revenue challenged the deletion of additions made on account of interest-free loans given to sister concerns. The CIT (A) had granted relief by holding that the assessee had sufficient net owned funds on which no interest was paid, and the loans given were negligible in comparison to the total funds. The Tribunal noted that the issue was covered by the decision of the Hon'ble jurisdictional High Court in CIT vs. Basti Sugar Mills Co. Ltd., which held that if there is no nexus between the borrowed funds and the interest-free loans given, the disallowance of interest is not warranted. The Tribunal also referred to the Supreme Court's decision in S.A. Builders Ltd. vs. CIT, which emphasized the concept of commercial expediency. Therefore, the Tribunal dismissed the revenue's appeal on this issue.

Conclusion:
The Tribunal partly allowed the revenue's appeals, upholding the reopening of assessment under Section 147 and the additions on account of bogus purchases. However, the Tribunal dismissed the revenue's appeals regarding the belated payment of employees' contribution to EPF and ESIC and the interest-free loans given to sister concerns. The order was pronounced in open court on June 28, 2012.

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