2017 (6) TMI 484 - AT - Income Tax

Assumption of jurisdiction u/s 147 / 148 - reasons to believe - lower net profit - Held that - The very basis of initiation of reassessment proceedings for which reasons to believe were recorded were income escaping assessment in respect of lower net profit, the same having not been escaped, the AO proceeded to make additions on account of disallowance of rent and electricity charges and additions made on account of share application money was not permissible u/s 148 of the I.T. Act. In humble view if no additions were made in respect of the reasons i.e. lower net profit, it was not open to the AO to make additions on other grounds such as disallowance of expenses and addition on account of share capital money without first issue a notice 148 of the I.T. Act. The AO was therefore not justified in reopening of the assessment when the reasons for the initiation of reassessment proceedings ceased to survive/exist. - Decided in favour of assessee.

Issues:
- Reopening of assessment under sections 147 and 148 of the Income Tax Act
- Validity of additions made during reassessment
- Jurisdiction of the Assessing Officer
- Disallowance of expenses and unexplained share application money

Analysis:

Reopening of Assessment under Sections 147 and 148:
The appeals by the assessee were against orders of the CIT(A) for the assessment years 2009-10, 2010-11, and 2011-12. The representative of both parties argued mainly regarding the assessment year 2009-10, with the contention that issues were the same in the other years as well. The reassessment for the year 2009-10 was based on a survey conducted at the business premises, leading to the issuance of a notice under section 148 of the IT Act. The AO made additions on account of disallowance of rent and electricity charges, as well as unexplained share application money under section 68 of the IT Act. The assessee challenged the reopening of the assessment and the additions made, leading to the present appeal.

Validity of Additions Made During Reassessment:
The AO accepted the returned income but made independent additions on expenses and share application money. However, the reasons recorded for reopening the assessment were solely based on the lower net profit declared by the assessee. The reassessment order did not include the addition based on the lower net profit. Legal precedents were cited to support the argument that if the AO accepts that the income initially believed to have escaped assessment has not done so, making additional unrelated additions is impermissible. The High Courts' decisions emphasized that additions unrelated to the reasons for reopening the assessment cannot be made without issuing a fresh notice under section 148 of the IT Act.

Jurisdiction of the Assessing Officer:
The AO's jurisdiction to make additions during reassessment was questioned based on the discrepancy between the reasons recorded for reopening the assessment and the actual additions made. The AO's actions were deemed unjustified as the reasons for initiating the reassessment proceedings ceased to exist once the lower net profit issue was not pursued in the reassessment order.

Disallowance of Expenses and Unexplained Share Application Money:
The AO's decision to disallow expenses and add unexplained share application money without a valid basis in the reasons for reopening the assessment was found to be legally untenable. The reassessment proceedings were set aside, and all additions were deleted, as they were not supported by the reasons recorded for reopening the assessment.

In conclusion, the reassessment order and the subsequent proceedings were deemed unsustainable, leading to the allowance of the assessee's appeals for all the assessment years in question.

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