2017 (6) TMI 517 - AT - Income Tax

Reopening of assessment - unexplained investments - assessment year 2006-07 and 2008-09 - Held that - Assessing Officer was precluded from making the additions to the returned income, considering the fact that the income referred to in the reasons recorded for issuance of notice u/s 147/148 of the Act has not been assessed. Therefore, the additions of ₹ 22,48,808/- made to the returned income during the reassessment proceedings are beyond the jurisdiction of the Assessing Officer and deserve to be set aside. See CIT Versus Jet Airways (I) Ltd. 2010 (4) TMI 431 - HIGH COURT OF BOMBAY Addition u/s 68 - non explanation to the source of capital - Held that - The explanation of the Assessee is purely based on the affidavit of the mother, Mrs Meena Godbole and find that apart from making general averments of having advanced monies to the Assessee during the period 2001 to 2011, no specific details have been provided. It is also not stated as to the manner in which the amounts have been advanced to the Assessee. The affidavit also does not bring out any concrete sources of income available with Mrs Meena Godbole to justify the gifting of amounts to the Assessee. Therefore, it is a case where the explanation furnished by the Assessee is neither amenable to any verification and nor it refers to any specific source of funds. Therefore, the income tax authorities have rightly considered the sum as unexplained cash credit within the meaning of Section 68 of the Act. Thus, on this aspect, Assessee fails. Deemed dividend addition u/s 2(22)(e) - Held that - As no business considerations have been explained for the giving and receipt of monies from the company. Therefore, we uphold the invoking of section 2(22)(e), in principle. With regard to the quantum of amount assessable u/s 2(22)(e) we have perused the statement of account pertaining to the period under consideration and in terms there of, it is quite clear that the opening balance of ₹ 6,52,674/- cannot be construed an amount received during the year, and thus the same cannot be assessed u/s 2(22)(e) in this year. AO has assessed an amount of ₹ 3,93,445/- which is the closing balance at the end of the year, a part of which is from the opening balance. The only amount which can be assessed u/s 2(22)(e) is a sum of ₹ 1,50,000/- advanced to the Assessee on 17.7.2008 as is evident from the statement of account placed. Therefore, we direct AO to restrict the addition on account of deemed dividend under section 2(22)(e) of the Act to ₹ 1,50,000/- as against ₹ 3,93,445/- made by him. Adhoc disallowance made out of the expenses debited to the Profit and Loss Account on account of the telephones, car, computer expenses etc. - AO disallowed 20% of the total expenses, being ₹ 18,662/- and the same has been reduced by the CIT(Appeals) to 10% - Held that - It is quite clear from the order of the authorities below that the disallowance is purely adhoc based on mere surmises and conjectures and therefore the same is directed to be deleted in its entirety. Thus, on this aspect also, Assessee succeeds.

Summary

Issues Involved:
1. Validity of the assessment made by the Assessing Officer for assessment years 2005-06, 2006-07, and 2008-09.
2. Addition of ?5,00,000/- as unexplained cash credit under Section 68 for assessment year 2009-10.
3. Addition of ?3,93,445/- as 'deemed dividend' under Section 2(22)(e) for assessment year 2009-10.
4. Adhoc disallowance of expenses debited to the Profit and Loss Account for assessment year 2009-10.

Detailed Analysis:

1. Validity of the Assessment (Assessment Years 2005-06, 2006-07, and 2008-09):
The Assessee challenged the validity of the assessment made by the Assessing Officer (AO) under Section 143(3) read with Section 147 of the Income Tax Act. The AO had reopened the assessment based on information regarding an investment in a flat at Adarsh Cooperative Housing Society Limited, Mumbai. The AO did not make any additions related to this investment but made three other additions: unexplained credits of ?9,24,000/-, unexplained money from cash sales and opening stock of ?12,84,640/-, and disallowance of 20% expenses amounting to ?40,168/-.

The Tribunal referred to the Hon'ble Bombay High Court's judgment in CIT Vs. Jet Airways (I) Ltd., which held that if the AO does not assess the income that led to the reopening of the assessment, he cannot assess other incomes discovered during the reassessment proceedings. Since the AO did not assess the income related to the investment in the flat, the Tribunal ruled that the AO was precluded from making the other additions. Thus, the additions were set aside, and the appeals for assessment years 2005-06, 2006-07, and 2008-09 were allowed.

2. Addition of ?5,00,000/- as Unexplained Cash Credit (Assessment Year 2009-10):
The AO added ?5,00,000/- as unexplained cash credit under Section 68, which the Assessee claimed was a gift from her mother, supported by an affidavit. The AO and CIT (Appeals) found the affidavit insufficient as it lacked details about the mode, source, and creditworthiness of the donor.

The Tribunal upheld this addition, noting that the affidavit did not provide specific details or verifiable sources of income for the donor. Thus, the sum of ?5,00,000/- was rightly considered as unexplained cash credit.

3. Addition of ?3,93,445/- as 'Deemed Dividend' (Assessment Year 2009-10):
The AO treated a loan of ?3,93,445/- from M/s Apeksha Impex Pvt. Ltd. as 'deemed dividend' under Section 2(22)(e), as the Assessee held 25% voting power in the company. The CIT (Appeals) affirmed this addition.

The Tribunal agreed in principle with the invoking of Section 2(22)(e) but noted that the opening balance of ?6,52,674/- should not be considered as it was not received during the assessment year. Only ?1,50,000/- advanced on 17.7.2008 was deemed dividend. Thus, the Tribunal directed the AO to restrict the addition to ?1,50,000/-.

4. Adhoc Disallowance of Expenses (Assessment Year 2009-10):
The AO disallowed 20% of the expenses debited to the Profit and Loss Account, which was reduced to 10% by the CIT (Appeals). The Tribunal found the disallowance purely adhoc and based on conjectures, directing its deletion in entirety.

Conclusion:
The appeals for the assessment years 2005-06, 2006-07, and 2008-09 were allowed, setting aside the additions made by the AO. For the assessment year 2009-10, the appeal was partly allowed, upholding the addition of ?5,00,000/- as unexplained cash credit, restricting the 'deemed dividend' addition to ?1,50,000/-, and deleting the adhoc disallowance of expenses. The stay applications were dismissed as infructuous.