2017 (11) TMI 1476 - AT - Income Tax

Reopening of assessment - Disallowance u/s. 40A(3) - whether the site was not purchased by the assessee and that no cash payment made to a single party has exceeded ₹ 20000/ - per day, towards purchase of materials? - Held that - It is a fact that survey operations were conducted during the financial year itself and the AO came to know that the AOP was doing business from 01-01-2005 and returns were yet to be filed. It is on record that the members purchased the site from their own sources in their individual capacity and formed the AOP to do business. How the payments are to be considered in the hands of the AOP is not explained by the AO, while considering the same for violation of Section 40A(3). Moreover, regarding the so called cash payments under the head construction etc., the same were verified by the AO in the earlier scrutiny assessment and disallowed the entire amount of vouchers which were defective. How the same also can be considered for disallowance u/s. 40A(3) is also not explainable. The earlier assessment order of AO indicates that he has considered the facts and made assessment disallowing certain defective vouchers. Thus, the contentions of present AO while reopening assessment is devoid of merit. The basis of reopening is the record only and there is no failure on the part of assessee. Moreover, not only during survey but also in the course of assessment, the books of account were examined by the AO. So, the argument of AO is that 3CD report is misleading cannot be accepted. In fact, when entries are passed in AOP Books about the capital contribution, the same cannot be considered as payment by AOP for purchase of property, which happened in individual hands of members. Thus, the reopening per se is on wrong appreciation of facts and comes within the purview of change of opinion - Decided in favour of assessee.

Summary

Issues:
- Validity of reopening assessment under Section 147
- Disallowance under Section 40A(3)
- Levy of interest under Sections 234-B and 234-C

Validity of Reopening Assessment under Section 147:
The appeal was against the Commissioner of Income Tax (Appeals)-2, Hyderabad's order for the AY 2006-07. The Assessing Officer (AO) reopened the assessment after four years but before six years, citing cash payments attracting disallowance under Section 40A(3). The AO disallowed an amount despite the assessee's explanation that payments for site purchase were made by partners individually and construction expenses were below the disallowance threshold. The AO's reasoning lacked merit as the original assessment considered facts and disallowed certain vouchers. The AO's contention that the 3CD report was misleading was rejected, and the reassessment was deemed a change of opinion without any failure on the assessee's part.

Disallowance under Section 40A(3):
The AO disallowed an amount under Section 40A(3) based on cash payments made by the assessee, which the Commissioner of Income Tax (Appeals) confirmed. However, the Commissioner summarily dismissed the assessee's contentions without considering the submissions or case law cited. The Commissioner's failure to address the facts and legal arguments presented by the assessee led to the appeal's success, highlighting the lack of proper adjudication by the Commissioner.

Levy of Interest under Sections 234-B and 234-C:
The AO levied interest under Sections 234-B and 234-C in the reassessment order, which the assessee contested. The Tribunal found that no interest was levied in the original assessment order, questioning the justification for imposing interest in the reassessment. The Tribunal ruled in favor of the assessee, deeming the levy of interest in the reassessment unjustified and not in line with the original assessment.

In conclusion, the Tribunal allowed the appeal, emphasizing the lack of merit in the reassessment proceedings, the failure to consider the assessee's contentions, and the unjustified levy of interest under Sections 234-B and 234-C. The original assessment order was reinstated, highlighting the importance of proper assessment procedures and adherence to legal provisions in income tax matters.