2012 (9) TMI 837 - AT - Income Tax

Re-opening of assessment u/s 147/148 - Held that - As during the course of assessment proceedings for A.Y 2004-05 AO noticed that there were certain discrepancies in the bank account leading to a belief that certain income had escaped assessment in the hands of the assessee which was not denied by the assessee - as all these assessments were framed under section 143(1) there is no infirmity in the order passed by CIT(A) vide which validity of reassessment proceedings has been upheld - against assessee. Estimation of 5% agency income in the hands of the assessee - Treating appellant as Permanent Establishment of a Foreign Company - Held that - As the existence of the foreign party and its genuineness has not been doubted by the AO as the assessee apart from receiving separate funds has also imported goods from the said party for its own trade no material placed on record by the revenue to establish the same - As right from the beginning it is the case of the assessee that the said amount was placed with it in Trust and assessee has been submitting the accounts of the same to the said party which did not have any objection upon such spending. In the account also no commission has been charged by the assessee. Therefore, the addition is made simply on the basis of presumption, which is not sustainable. Therefore, the addition in respect of assessment years 2000-01 to 2002-03 is deleted - in favour of assessee. Disallowance of 20% of expenses - telephone, postage, courier, sales promotions and conveyance - Held that - There is no dispute to the fact that the assessee has not been able to produce all documentary evidences to establish that the entire expenditure has been incurred by the assessee under the above heads for its business purposes. It is a fact that the assessee has also undertaken promotional activities to promote brand products of M/s. Miraj PTE Ltd in India and the receipt as well as expenditure have not been routed through P&L account of the assessee. Substance in the observations of CIT(A) that a part of expenditure claimed by the assessee under the above heads could be for the purpose of promotional activities for the purposes of promotional activities. As decided in CIT v. Calcutta Agency Ltd.(1950 (12) TMI 4 - SUPREME COURT) that if the assessee fails to establish the fact of necessary documents to claim for deduction under section 37(1), the claim is not admissible. Thus disallowance of 20% as confirmed by CIT(A) out of the expenses claimed by the assessee is reasonable - against assessee.

Issues Involved:
1. Validity of re-opening under sections 147/148.
2. Treating the appellant as a Permanent Establishment of a Foreign Company.
3. Rejection of Books of Accounts under section 145.
4. Additions of expenditures not charged to P&L Account.
5. Additions of expenses charged to P&L Account.
6. Estimation of 5% agency income from expenditures.

Issue-Wise Detailed Analysis:

1. Validity of Re-opening under Sections 147/148:
The assessee challenged the reopening of assessments for the years 2000-01 to 2002-03 under sections 147/148, arguing that it was without valid reasons. The AO had reopened the assessments based on the information that the assessee received payments from M/s. Miraj Pte. Ltd. which were not routed through the P&L Account. The CIT(A) upheld the reopening, stating that the AO had followed procedural requirements, had the necessary approvals, and had valid reasons to believe that income had escaped assessment. The tribunal supported the CIT(A)'s findings, noting that the AO had a bona fide belief based on discrepancies noticed during the assessment for the year 2004-05, and dismissed the assessee's challenge on this ground.

2. Treating the Appellant as a Permanent Establishment of a Foreign Company:
The AO treated the appellant as a Permanent Establishment (PE) of M/s. Miraj Pte. Ltd., arguing that the receipts and expenditures related to agency promotion activities should be treated as business receipts and expenditures. The tribunal did not specifically address this issue separately but dealt with it in the context of the estimation of agency income and rejection of books of accounts.

3. Rejection of Books of Accounts under Section 145:
The AO rejected the books of accounts under section 145, citing discrepancies and the failure to route certain transactions through the P&L Account. The tribunal upheld this rejection, agreeing with the AO that the books did not reflect the true state of affairs and that the assessee had not maintained proper books of accounts for its activities.

4. Additions of Expenditures Not Charged to P&L Account:
The AO made additions for expenditures not charged to the P&L Account, including cash expenses and donations. The tribunal found that these expenditures were made from funds received in "Trust" from M/s. Miraj Pte. Ltd. and were not at the assessee's disposal. The tribunal deleted these additions, noting that the assessee had not claimed these expenditures as deductions in the P&L Account.

5. Additions of Expenses Charged to P&L Account:
The AO made disallowances for expenses charged to the P&L Account, including cash, conveyance, and telephone expenses. The tribunal referred to its earlier decision in the assessee's case for A.Y. 2004-05, where a 20% disallowance of such expenses was upheld due to the lack of supporting documentary evidence. The tribunal followed this precedent and upheld the disallowance for all the years under appeal.

6. Estimation of 5% Agency Income from Expenditures:
The AO estimated a 5% agency income from the expenditures incurred by the assessee from funds received from M/s. Miraj Pte. Ltd. The tribunal noted that the assessee had received these funds for specific purposes and had maintained separate accounts for the same. The tribunal found that the addition was made on mere presumption without any supporting evidence. The tribunal deleted the addition, stating that the revenue had not established that the assessee had earned any income from these expenditures.

Conclusion:
The tribunal partly allowed the appeals, upholding the validity of the reassessment proceedings and the disallowance of certain expenses charged to the P&L Account, while deleting the additions related to expenditures not charged to the P&L Account and the estimation of agency income.

← Previous Next →