2020 (11) TMI 775 - AT - Income Tax

Reopening of assessment u/s 147 - Notice solely on the basis of the information received from the Investigation Department - non independent application of mind - HELD THAT - The original return of income filed by the assessee on 17.10.2007 was processed u/s 143(1) of the Act. On the basis of information received from the Director General of Income Tax (Investigation) that the assessee had obtained accommodation entries controlled and managed by Shri Pravin Kumar Jain, whose statement was recorded u/s 132(4) during the course of search on 01.10.2013, wherein he admitted that he indulged in providing accommodation entries, the AO recorded the reasons and then issued notice u/s 148 of the Act. A perusal of para 6 of the assessment order clearly indicates that the assessee invested ₹ 15,00,000/- in M/s Javda India Impex Ltd. is a minor error in view of the fact that the original return was processed u/s 143(1) of the Act. The Hon ble Supreme Court in the case of ACIT v. Rajesh Jhaveri Stock Brokers P. Ltd. 2007 (5) TMI 197 - SUPREME COURT analyzed the distinction between the acceptance of a return u/s 143(1) and an assessment which is framed u/s 143(3) of the Act. In the former case, the AO would have much wider latitude to reopen the assessment. Intimation u/s 143(1) is not an assessment. Thus in the instant case, the AO has rightly issued notice u/s 148 for reopening the return of income processed u/s 143(1). Addition made on account of share application money u/s 68 - HELD THAT - In the instant case, the onus clearly shifted to the AO. There was enough material before the AO in the shape of loan confirmation, ledger account, bank account statement to make further inquiry/verification in the above matter. In the instant case, the AO has not done even elementary/ preliminary inquiry to verify the genuineness of the transaction. The addition made by him is based on surmises and conjectures. The ratio laid down by the Hon ble Bombay High Court in the case of Orchid Industries Pvt. Ltd. 2017 (7) TMI 613 - BOMBAY HIGH COURT is squarely applicable here. Respectfully following the same, we delete the addition. Disallowance against cost of purchases and expenses - Addition from the purchase and other expenses - books of accounts were not rejected by the AO before making such ad-hoc disallowance - HELD THAT - In the instant case, as the disallowance made by the AO is on ad-hoc basis without rejecting the books of accounts maintained by the assessee, we delete the addition of ₹ 5,00,000/- by following the ratio laid down in R.G. Buildwell Engineers Ltd. 2018 (10) TMI 252 - SC ORDER - 3rd ground of appeal is allowed.

Summary

Issues Involved:
1. Validity of the reopening of the assessment under section 148 of the Income Tax Act.
2. Addition of ?15,00,000 as bogus unsecured loan and ?44,795 as interest.
3. Addition of ?30,000 as expenditure assumed to have been incurred for obtaining the loan.
4. Ad-hoc disallowance of ?5,00,000 against cost of purchases and expenses.

Issue-wise Detailed Analysis:

1. Validity of the Reopening of the Assessment under Section 148:
The assessee contested the reopening of the assessment by the Assessing Officer (AO), arguing it was based solely on information from the Investigation Department. The CIT(A) upheld the reopening, stating the AO had specific information that income had escaped assessment and followed due procedure. The Tribunal admitted this additional ground of appeal but found that the AO had rightly issued notice under section 148. The AO had reason to believe that income amounting to ?15,00,000 had escaped assessment based on information from the Director General of Income Tax (Investigation) regarding accommodation entries provided by Shri Pravin Kumar Jain. The Tribunal referenced the Supreme Court's decision in ACIT v. Rajesh Jhaveri Stock Brokers P. Ltd., emphasizing that at the stage of issuing notice, the AO only needed a prima facie reason to believe, not conclusive proof. Thus, the reopening was deemed valid and the additional ground was dismissed.

2. Addition of ?15,00,000 as Bogus Unsecured Loan and ?44,795 as Interest:
The AO added ?15,00,000 as a bogus unsecured loan from M/s Javda India Impex Ltd., and ?44,795 as interest, stating the lender did not respond to a notice under section 133(6). The CIT(A) upheld this, citing the lender's failure to provide confirmation and the lack of evidence of the loan's repayment. The assessee provided loan confirmation, ledger accounts, and bank statements, but the AO did not conduct further verification. The Tribunal found the AO's addition based on conjecture and surmises, not on substantial inquiry. Citing the Bombay High Court's decision in CIT v. Orchid Industries Ltd., the Tribunal held that the assessee had discharged its onus under section 68 by providing sufficient documentary evidence. Consequently, the addition of ?15,00,000 and ?44,795 was deleted, and the first ground of appeal was allowed.

3. Addition of ?30,000 as Expenditure Assumed to Have Been Incurred for Obtaining the Loan:
Given the Tribunal's decision to delete the addition of ?15,00,000 as a bogus unsecured loan, the related addition of ?30,000 as expenditure assumed to have been incurred for obtaining the loan was deemed consequential. The Tribunal allowed this ground of appeal, deleting the ?30,000 addition.

4. Ad-hoc Disallowance of ?5,00,000 Against Cost of Purchases and Expenses:
The AO made an ad-hoc disallowance of ?5,00,000 due to the assessee's failure to provide supporting documents for purchases and expenses. The CIT(A) confirmed this disallowance. However, the Tribunal noted that the AO did not reject the assessee's books of accounts before making the ad-hoc disallowance. Referring to the Supreme Court's decision in Pr. CIT v. R.G. Buildwell Engineers Ltd., the Tribunal held that ad-hoc disallowances without rejecting the books of accounts are not sustainable. Therefore, the addition of ?5,00,000 was deleted, and the third ground of appeal was allowed.

Conclusion:
The appeal was partly allowed, with the Tribunal validating the reopening of the assessment but deleting the additions related to the bogus unsecured loan, the related interest, the assumed expenditure for obtaining the loan, and the ad-hoc disallowance against purchases and expenses. The order was pronounced in the open Court on 23/11/2020.