2016 (6) TMI 741 - HC - Income Tax

Reopening of assessment - Entitlement to exemption under section 10AA - applicability of Section 69C - bogus purchases - Held that - Even if the expenditure of the so called bogus purchases is disallowed, the only effect it could have is to increase the profit of the assessee which in any case is exempt under section 10AA of the Act. Section 147 of the Act would be applicable where the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment. When this fundamental requirement fails, power of reopening cannot be exercised. We are unable to appreciate the argument of the counsel for the Revenue that such income would not qualify as business income and that it should be treated as income from other sources by applying section 69C of the Act. This section pertains to unexplained expenditure and provides that where, in any financial year, an assessee has incurred any expenditure and he offers no explanation about the sources of such explanation or part thereof or the explanation offered is not satisfactory, the amount covered by such expenditure or the part, as the case may be, would be deemed to be the income of the assessee for such financial year. The present is not a case where the assessee has incurred expenditure, but failed to offer explanation about the source of such expenditure. The source of expenditure in question was very much available since in the reasons recorded itself, the Assessing Officer points out that the purchases were made by making cheque payments. Section 69C of the Act therefore has no applicability. Respective impugned notices for reopening of assessment are quashed. - Decided in favour of assessee

Summary

Issues:
1. Reopening of assessment under section 147 of the Income Tax Act 1961 based on alleged bogus purchases.
2. Application of mind by the Assessing Officer in recording reasons for reopening.
3. Failure to disclose material facts by the assessee.
4. Tax implications of alleged bogus purchases on the assessee's income exempt under section 10AA of the Act.

Analysis:

Issue 1: Reopening of assessment based on alleged bogus purchases
The Assessing Officer issued a notice to reopen the assessment for the assessment year 2008-09, citing information from a search and seizure action revealing alleged bogus purchases by the assessee. The reasons recorded by the Assessing Officer indicated that the assessee accepted accommodation entries for purchases from a specific entity, leading to an alleged escapement of income. The petitioner contested the reopening, arguing against the validity of the reasons provided.

Issue 2: Application of mind by the Assessing Officer
The court examined the reasons recorded by the Assessing Officer and found that they were based on information collected during an investigation by the income tax department. The court emphasized that the Assessing Officer must independently apply her mind before issuing a notice for reopening. In this case, the court concluded that the reasons demonstrated the Assessing Officer's decision based on the material collected, allowing for the reopening of the assessment.

Issue 3: Failure to disclose material facts
The petitioner contended that there was no failure on their part to disclose all material facts, thus challenging the validity of the reopening beyond the permissible period. However, the court rejected this contention, noting sufficient prima facie evidence of the assessee's involvement in bogus purchases, which was not disclosed during the original assessment.

Issue 4: Tax implications of alleged bogus purchases
The crucial argument raised was the tax implications of the alleged bogus purchases on the assessee's income exempt under section 10AA of the Act. The court analyzed the scenario and concluded that even if the alleged purchases were disallowed, leading to an increase in the assessee's profit, the income would remain exempt under section 10AA. Therefore, there would be no additional tax burden on the petitioner, rendering the reopening of assessment unnecessary.

In the final judgment, the court allowed all petitions, quashing the impugned notices for reopening of assessment. The court emphasized that the fundamental requirement for reopening, i.e., the belief that income chargeable to tax had escaped assessment, was not met in this case due to the exempt nature of the assessee's income under section 10AA.