2013 (5) TMI 559 - AT - Income Tax

Re-assessment - Reopening of assessment As per revenue assessee understated / concealed its income, particularly did not disclose correct income from her proprietary concern SAAJO a beauty parlour. The very basis of initiation of proceedings for which reasons to believe were recorded were income escaping assessment in respect of items of club fees, gifts and presents, etc., but the same having not been done, the AO proceeded to reduce the claim of deduction u/s 80HH and 80-I which as per our discussion was not permissible. Held that - In the case of CIT Vs. Jet Airways (I) Ltd. 2010 (4) TMI 431 - HIGH COURT OF BOMBAY and Ranbaxy Laboratories Ltd. Vs. CIT 2011 (6) TMI 4 - DELHI HIGH COURT Court held that the reassessment is not permissible wherein items of income said to have escaped assessment on which reassessment proposed not added but other deductions reduced. If during the course of the proceedings the Assessing Officer comes to the conclusion that some items have escaped assessment, then notwithstanding that those items were not included in the reasons to believe as recorded for initiation of the proceedings and the notice, he would be competent to make assessment of those items. For every new issue coming before the AO during the course of proceedings of assessment or reassessment of escaped income, and which he intends to take into account, he would be required to issue a fresh notice u/s 148. The facts and circumstances are exactly identical here that there is no addition on the basis of the complaint received that the turnover of M/s. Saajo and M/s. Savoy Imaging System, the proprietary concern are not disclosed. No addition is made rather from the records the information available was used for making disallowance i.e. ad hoc disallowances expenses namely, advertisement, telephone charges, electricity charges, motor car expenses, travelling expenses and repair and maintenance. Thu, the order of reopening is quashed assessee s appeals, is allowed.

Summary

Issues Involved:
1. Reopening of assessments under Section 147 read with Section 148 of the Income-tax Act, 1961.
2. Ad hoc disallowance of expenses.

Detailed Analysis:

Reopening of Assessments under Section 147/148:
The first issue concerns the confirmation by the CIT(A) of the reopening of assessments under Section 147 read with Section 148 of the Income-tax Act, 1961. The assessee filed returns for the assessment years 2005-06 and 2006-07, which were processed under Section 143(1). The Assessing Officer (AO) reopened the assessments based on information received from a tax evasion petition alleging that the assessee understated income from her proprietary concern, M/s. Saajo. The AO noted that the assessee did not file Income Expenditure or profit and loss accounts for M/s. Saajo in the returns for the relevant years, unlike in the previous year (2004-05), where a profit and loss account was filed. The AO issued notices under Section 148, and the assessee challenged the reopening before the CIT(A), arguing that complete details were filed and the AO had no valid basis for reopening. The CIT(A) dismissed the appeal, stating that the AO had sufficient information to reopen the assessments.

The tribunal found that the assessee had not filed the Balance Sheet and P&L Account of M/s. Saajo along with the original returns. The tribunal referred to the judgments of the Hon'ble Bombay High Court in CIT Vs. Jet Airways (I) Ltd. and the Hon'ble Delhi High Court in Ranbaxy Laboratories Ltd. Vs. CIT, which held that reassessment is not permissible if the income that was the basis of the formation of the reason to believe is not assessed. The tribunal concluded that the AO made ad hoc disallowances on expenses without addressing the alleged understatement of income from M/s. Saajo. Consequently, the tribunal quashed the reopening of assessments for both years, reversing the orders of the lower authorities.

Ad Hoc Disallowance of Expenses:
The second issue pertains to the ad hoc disallowance of expenses by the AO, which was confirmed by the CIT(A). The assessee challenged the disallowances of various expenses, including advertisement, electric charges, service charges, drawing, telephone charges, motor car expenses, and repair and maintenance. The AO had made these disallowances on an estimated basis (5% or 10%) without any concrete evidence or basis.

The tribunal found that the AO's ad hoc disallowances were made without any basis and were merely estimated. The CIT(A) also confirmed these disallowances without providing a valid reason. The tribunal held that such ad hoc disallowances are not permissible without a proper basis. Therefore, the tribunal deleted the ad hoc disallowances for both assessment years.

Conclusion:
In conclusion, the tribunal allowed the appeals of the assessee, quashing the reopening of assessments under Section 147/148 and deleting the ad hoc disallowances of expenses for both assessment years. The order was pronounced in the open court.