2014 (12) TMI 559 - AT - Income Tax

Validity of reopening of assessment u/s 147 Assessee contended that the assessment cannot be reopened after expiry of 4 years unless there is omission or failure on the part of Assessee to disclose fully and truly all the material facts necessary for assessment - Held that - The addition ultimately made while completing assessment u/s 143(3) read with section 147 of the Act, has absolutely no nexus with the reasons recorded - action u/s 147 of the Act, was initiated after expiry of four years from the end of the relevant AY i.e. 2002-03 - neither there is any allegation by AO that escapement of income was due to failure on the part of assessee to disclose truly and fully all materials facts necessary for his assessment nor there is tangible material in possession of AO to show that there is escapement of income or under assessment of income - the addition ultimately made by AO has no nexus with the reasons recorded - reopening of assessment u/s 147 of the Act, beyond a period of four years from the relevant AY, that too in absence of tangible material is invalid in law relying upon M/s. Rohini Biotech (P) Ltd. And Others Versus ITO (OSD) -2, Central, Hyderabad 2014 (1) TMI 129 - ITAT HYDERABAD - there being no nexus or live-link with the reasons recorded and the formation of belief to come to a conclusion that there was escapement of income and also since the assessment has been reopened beyond the period of 4 years when there is no failure on the part of the assessee to fully and truly disclose all material facts in the original assessment itself, and there being no tangible material for the reopening of the assessment, the CIT(A) erred in confirming the order of the Assessing Officer thus, the assessment order passed u/s 143(3) read with section 147 of the Act has to be quashed Decided in favour of assessee. Addition on fixed assets by making investment in land u/s 69 Held that - The similar matter has been decided in M/s. Satabisha Biotech Pvt. Ltd. And Others Versus Income-tax Officer 2014 (12) TMI 431 - ITAT HYDERABAD wherein it has been held that assessees have made investments in fixed assets and the source of such investments was the inflow available on the Liability Side of the Balance Sheet - Since the Assessing Officer has not properly appreciated the facts, before the CIT(A), the source was explained, and the same was accepted by the CIT(A) - there cannot be any addition made in this year and even in the subsequent year, i.e. in the year of sale, the source of investment cannot be disputed - it is not a fit case for making the addition u/s 69 of the Act Decided in favour of assessee. Various expenses disallowed Held that - Assessee has not commenced its business activities during the year under consideration, hence, preoperative expenses, whatever has been incurred, have to be capitalized as there was no business income earned during the year against which it can be set off. In the aforesaid facts and circumstances, assessee s claim of expenditure/allowances could not have entertained - the order of the CIT(A) is upheld Decided against assessee. Verification of fresh evidences considered or not Held that - CIT(A) after considering the submissions of assessee in the context of facts and materials on record rightly deleted the addition made by AO as not only assessee has proved the identity of the creditor but also genuineness of the transaction as well as creditworthiness of the creditor was established - facts and evidences relating to unsecured loan from Shri B. Suryanarayana Raju were also part of the record before AO thus, there was no merit in the contention that CIT(A) has considered fresh evidence while deleting addition Decided against revenue. Assessment of agricultural income Income treated as income from other sources Held that - CIT(A) did not accept the claim of assessee for the reason that assessee itself did not claim it as agricultural income and has shown it as business receipt there was no infirmity in the assessment order for treating lease rental income as income from other sources - Similarly, decision of ld. CIT(A) in respect of allowance of administrative expenditure is just and reasonable as he has sustained a part of disallowance made by AO since assessee could not substantiate its claim fully the order of the CIT(A) is upheld Decided against assessee.

Summary

Issues Involved:
1. Validity of proceedings initiated under Section 147 of the Income Tax Act.
2. Legitimacy of additions made by the Assessing Officer (AO).
3. Treatment of agricultural income and lease rental income.
4. Allowability of various expenses and depreciation.
5. Verification of fresh evidence during appellate proceedings.

Issue-wise Detailed Analysis:

1. Validity of Proceedings Initiated Under Section 147:
The common issue in ITA Nos. 535, 537, 538, 539, 500 & 501/Hyd/2014 was the validity of proceedings initiated under Section 147 of the Income Tax Act and the assessment orders passed consequently. The Tribunal found that the reasons recorded for reopening the assessment had no nexus with the additions ultimately made. The original assessments were completed under Section 143(3), and the reopening was beyond four years from the end of the relevant assessment year without any tangible material or failure on the part of the assessee to disclose fully and truly all material facts. The Tribunal held that the reopening of assessments under Section 147 was invalid in law, referencing earlier decisions in similar cases. Consequently, the assessment orders passed under Section 143(3) read with Section 147 were quashed.

2. Legitimacy of Additions Made by AO:
The Tribunal noted that the additions made by the AO had no connection to the reasons recorded for reopening the assessments. The AO's actions were based on the denial of explanations provided by the assessee regarding various investments, credits, and loans, which were already accounted for in the books. The Tribunal found no evidence of siphoning funds or income escapement, thus invalidating the additions made by the AO.

3. Treatment of Agricultural Income and Lease Rental Income:
In ITA No. 499/Hyd/2014, the issue was whether the agricultural income shown by the assessee should be treated as income from other sources. The AO treated the lease rental income as income from other sources due to the assessee's failure to substantiate the lease rental income. The Tribunal upheld the AO's decision, noting that the assessee itself had treated the lease rental income as business income and not as agricultural income.

4. Allowability of Various Expenses and Depreciation:
In ITA No. 502/Hyd/2014, the AO disallowed certain expenditures and depreciation claimed by the assessee due to the non-production of books of account and vouchers for verification. The Tribunal upheld the disallowance, noting that the assessee had not commenced its business activities during the year under consideration, and thus, the expenses were preoperative and had to be capitalized. The Tribunal found no infirmity in the order of the CIT(A), who had allowed only necessary statutory compliance expenses.

5. Verification of Fresh Evidence During Appellate Proceedings:
In ITA Nos. 686 & 687/Hyd/2014 and ITA No. 629/Hyd/2014, the department contended that the CIT(A) erred in deciding the appeals without giving the AO an opportunity to verify fresh evidence produced during appellate proceedings. The Tribunal dismissed the department's appeals as infructuous since the assessment orders were quashed. In ITA No. 685/Hyd/2014, the Tribunal found that the CIT(A) had considered facts and evidence already part of the assessment record, and thus, there was no merit in the department's contention.

Conclusion:
Appeals in ITA Nos. 535, 537, 538, 539, 500, 501, 536, 540/Hyd/2014 were allowed, quashing the assessment orders passed under Section 143(3) read with Section 147. Appeals in ITA Nos. 502, 685, 686, 687, 499, and 629/Hyd/2014 were dismissed, upholding the decisions of the CIT(A) and the AO.