M/s. Gita Refractories Private Limited, Bangalore V. Income Tax Officer, Ward- 11(2), Bangalore

ITA 81/BANG/2020

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 8667 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 9 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-11-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Next Hearing Date: 09-11-2022
• Assessment Year: 2007-2008
• Appeal Filed On: 15-01-2020
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Reopening of assessment; Depreciation; Income from undisclosed sources; Opportunity of being heard; Additional evidence; Reason to believe
• Section: 147; 148; 69C; 139; 234B; 250; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER ITA No.81/Bang/2020 Assessment year : 2007-08 M/s. Gita Refractories Pvt. Ltd., No.2, Opp. Kalpana Chawla Road, 5 th Main, 4 th Cross, Bhoopsandra, Sanjay Nagar, RMV 2 nd Stage, Bangalore – 560 094. PAN: AAACG 5273C Vs. The Income Tax Officer, Ward 11(2), Bangalore. ASSESSEE RESPONDENT Assessee by : Shri Ravi Shankar, Advocate Respondent by : Shri Pavan Kumar, Addl.CIT(DR), ITAT, Bangalore. Date of hearing : 10.11.2022 Date of Pronouncement : 11.11.2022 O R D E R Per Padmavathy S., Accountant Member This appeal is against the order of the CIT(Appeals)-3, Bangalore dated 28.11.2019 for the assessment year 2007-08. 2. The assessee raised the following grounds of appeal:- “1. The learned CIT (A) erred in passing the order in the manner which he did. ITA No.81/Bang/2020 Page 2 of 18 2. On the facts and in the circumstances of the case, the reopening of the assessment u/s 147 of the Act by issuing the notice u/s 148 was opposed to law and accordingly the assessment as made is liable to be cancelled. 3. The conditions precedent being absent, the re-opening of the assessment u/s 147 is bad in law. 4. The learned CIT(A) erred in taxing a sun of Rs. 49,04,000/- towards alleged suppressed sale of scarp without appreciating the explanation of the Assessee. 5. Without prejudice the addition is excessive arbitrary and excessive and ought to be reduced substantially. 6. The learned CIT(A) erred in upholding the interest under sec 234A, 234B and 234C of the Act. 7. For these and such other grounds that may be urged at the time of hearing the Assessee prays that the appeal may be allowed.” 3. The assessee further raised additional grounds as follows. However the ld AR did not press for these grounds and hence the same is dismissed as not pressed. 1. The mandatory sanction under 151 of the Act is not taken and the assessment proceedings are void ab initio on the facts and circumstances of the case. 2. Without prejudice, the mandatory sanction under section 151 of the Act is not taken in accordance with law and the assessment proceedings are void ab initio on the facts and circumstances of the case 4. The assessee also raised the following additional grounds of appeal:- ITA No.81/Bang/2020 Page 3 of 18 “1. The learned CIT(A) was not justified in confirming the addition of Rs.6,64,180/- without appreciating the submissions and documents filed on the facts and circumstances of the case 2. The learned CIT(A) was not justified in appreciating that the amount of Rs.4,99,180 was a noting in respect of a vendor who was properly accounted in the books of account of the assessee and no additions could have been sustained as having been unexplained on the facts and circumstances of the case 3. The learned CIT(A) was not justified in appreciating that the personal notings of the director of Rs.1,65,000 could not have been added in the hands of the assessee since the director had interest in several business and were not relating to the assessee on the facts and circumstances of the case. 4. The Assessee craves leave to add, alter, amend, substitute, change and delete any of the grounds of appeal. 5. For the above and other grounds that may be urged at the time of hearing of the appeal, the Assessee prays that the appeal may be allowed and justice rendered.” 5. The additional grounds raised above do not require examination of new facts otherwise than on record and same is pure question of law. Therefore, placing reliance on the judgment of the Hon’ble apex Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC), the additional grounds for substantial cause and justice is taken on record and we proceed to dispose of the same on merits 6. The assessee is a manufacturer of refractories products such as bricks, heat resistant products for use in heat treatment industry apart from melting kilns. For the AY 2007-08, the assessee filed the return of income on 15.11.2007 returning an income of NIL after setting off ITA No.81/Bang/2020 Page 4 of 18 loss of Rs.14,46,713. There was a survey u/s.133A on 22.3.2011 in the business premises of the assessee. The assessment was reopened u/s. 147 based on the information contained in the books of accounts and other documents impounded in the course of survey. In response to notice issued u/s. 148, the assessee filed a letter requesting that the return of income already filed on 15.11.2007 may be treated as return filed in response u/s. 148. The AO based on the details found from the documents impounded in the course of survey made the addition of Rs.55,68,180. Aggrieved, the assessee filed appeal before the CIT(A) who confirmed the order of the AO. Aggrieved, the assessee is in appeal before the Tribunal. 7. Through ground Nos. 2 & 3, of the main grounds the assessee is contending the legal issue pertaining to the reopening of the assessment u/s. 147. The ld. AR submitted that during the course of survey, a diary which is the daily planner of the Director was impounded and the AO found entries in the daily planner which is not reflected in the books of accounts of the assessee. The reasons recorded by the AO is that the cumulative cash credits of the entries in the diary of the director are not recorded in the books of accounts should be brought to tax and that is the reason for reopening of the assessment. It is the contention of the ld. AR that the satisfaction recorded by the AO is not clear and the reason to suspect cannot replace the reason to believe for reopening of assessment u/s. 147. In this regard, the ld. AR relied on the Chhugamal Rajpal v. S.P. Chaliha [1971] 79 ITR 603 (SC) and ITO v. Lakhmani Mewal Das [1976] 103 ITA No.81/Bang/2020 Page 5 of 18 ITR 437 (SC). The ld. AR also drew our attention to the sworn statement recorded by Sri Rajagopal Gilada, Director (page 287 to 296 of paper book), wherein while answering Q.No.4, the Director has clearly given the various companies/firms in which the Director is part of and therefore the entries made in the daily planner cannot be solely related to the assessee where the AO has made the addition. 8. The ld. DR relied on the order of the lower authorities. 9. We heard the rival submissions and perused the material on record. During the survey proceedings certain books of accounts and diaries written by Mr.Rajgopal Gilda, MD of the assessee were found and impounded under inventory No.GRPL-63. The AO noticed that the diary has notings about the monitory transactions which are not recorded in the books and based on the same has issued notice u/s148 for reopening the assessment. Before proceeding further we will look at the provisions of section 147 Income escaping assessment 147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recomputed the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153, referred to as the relevant assessment year) : ITA No.81/Bang/2020 Page 6 of 18 Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure1 on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year. Explanation 1.—Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily1 amount to disclosure within the meaning of the foregoing proviso. Explanation 2.—For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :— (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax ; (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ; (c) where an assessment has been made, but— (i) income chargeable to tax has been underassessed ; or (ii) such income has been assessed at too low a rate ; or (iii) such income has been made the subject of excessive relief under this Act ; or ITA No.81/Bang/2020 Page 7 of 18 (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.] 10. The proviso and the explanations to section 147 are not applicable in the case of the assessee as the AO has re-opened the assessment within 4 years from the end of relevant assessment year in which the assessment u/s.143(3) was completed. Hence what is relevant here is the AO’s ‘reason to believe’ that any ‘income has escaped assessment’ where the original assessment is completed. 11. The reasons for the formation of the belief must have rational connection with or relevant bearing on the formation of belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Assessing Officer and the formation of his belief that there has been escapement of income of the assessee from assessment in the particular year. In the given case, from the notings in the diary, the AO has a reason to believe that the income that should have been offered in the hands of the assessee has escaped assessment and the AO has recorded the same. The contention of the ld AR that the AO has recorded that the cumulative figure in the notings should have been offered to is the ‘reason to belief’ is not correct. The reason to belief of the AO is the notings which is not recorded in the books thereby in the opinion of the AO has escaped assessment. The expression "believe" in Section 147 requires an objective satisfaction based on definite material and information, howsoever insufficient it is. The belief formed about escapement of income for recording reasons to reopen the assessment is only prima ITA No.81/Bang/2020 Page 8 of 18 facie. Such material coming from independent source may not be complete or full, may prove to be incorrect on inquiry, but before reopening assessment, the AO must be able to infer in good faith that income of the assessee is chargeable to tax and has escaped assessment. Thus, relevancy of material for formation of belief is crucial. The AO has noticed from the documents impounded during the course of search noticed that there are several entries relating to cash transactions and other receipts and payments which have not been recorded in the books of accounts of the assessee and on that ground the AO has a ‘reason to believe’ that the income has escaped assessment. Therefore in our considered view the notings in the diary impounded during the course of survey proceedings is a relevant material for the formation of the belief by the AO and hence we see no reason to interfere with the order of CIT(Appeals) in so far as the legal issue contended by the assessee is concerned. The grounds raised in this regard is dismissed. 12. Ground No.4 relates to the addition made with respect to purported sale of steel. The AO found in page No.48 of the impounded diary certain notings as under:- 1. Cash transaction/payments are through Githa. 2. L/C through sait - I st lot / 250 mtrs. Rs.6,40,800/- - 60/- 3204000 Rs.22,40,000/- - 240/- 2883600 Rs.28,88,800/- - 300 USD 13. The assessee submitted before the AO that these are calculations regarding material that are going to be imported by sister concern M/s. ITA No.81/Bang/2020 Page 9 of 18 Ajay Constructions. The AO did not accept the submissions of the assessee and held that this noting of similar nature made in diaries pertaining to AY 2005-06 where the assessee company was engaged in high sea sale of steel scrap and lot of cash transactions were made. The AO further held that the assessee company has not furnished any evidence of above transactions in the books of sister concern, M/s. Ajay Constructions and therefore all transactions entered in the diary pertains to the assessee and made an addition of Rs.32,04,000 as undisclosed income by sale of steel scrap. 14. The CIT(A) confirmed the addition by holding that similar addition was confirmed in AY 2005-06 and therefore the addition during the year under consideration is also upheld. 15. The AO also made an addition of Rs.17,00,000 based on the entry in page No.60 of the diary where the cash flow from various sources and payments to various persons have been noted. The assessee submitted that it is an entry of financial planning made for the day and therefore not recorded in the books. The AO concluded that the said notings pertains to amount receivable on sale of scrap and the assessee has not shown any evidence that receipt was accounted in any future date and made an addition of Rs.17 lakhs as undisclosed income. The CIT(A) upheld the addition. 16. With regard to the first addition of Rs.32,04,000 the ld AR submitted that the director of the assessee has negotiated for purchase of steel scrap for use in refurbishing the tempering kilns and made ITA No.81/Bang/2020 Page 10 of 18 projections in the planner of the approximate funds required for purchase of the same. The said transaction has fructified and the funds were transferred in the financial year 2007-08 i.e. AY 2008-09 (page 145-146) for the purchase of steel and the said products were also received from the seller, situated in Senegal, Africa. The details of payments made overseas and for purchase of steel was furnished before the CIT(A) (page 122, 125-130, 145-146) and also before the AO in remand proceedings. The AO has preferred not to comment on the same, which the CIT(A) has summarily dismissed without proper reasoning. 17. Without prejudice it was submitted that the learned CIT(A) upon prima facie appreciation of the documents, ought to have appreciated that the entire addition was on an erroneous premise and a purchase of goods could not be considered as unaccounted sale and the entire addition of Rs. 32,04,000/- was required to be deleted. In view of the above the ld AR prayed that the entire additions made on the premise that the entries were pertaining to sale of goods were incorrect and rather purchase of goods and are required to be deleted in full. 18. With regard to the second addition the ld AR submitted that the assessee in the course of planning his cash flow for managing various business interests, has projected that Rs. 17,00,000/- could be raised out of refund of loans from M/s Ajay Constructions, Pune, arising out of sale of goods at Pune, in the regular course of their business, which was in the knowledge of the director of the assessee. The said funds ITA No.81/Bang/2020 Page 11 of 18 were intended to meet business requirements out of the loans earlier advanced to M/s Ajay Constructions, which is available in the financials of the assessee. The said monies totaling Rs. 20,00,000/- was also received back (page 150-151, 20/07/2007) in AY 2008-09 and the same is reflected in the bank accounts and also in the ledger accounts of the respective parties. The said entry in the planner of the director was a mere noting for future cash flows and there was no sale of scrap by the assessee. The documents filed by the assessee and the creditor are ample proof that the fund flow was anticipated to meet the requirement of the assessee's financial requirement, which was entirely explained and accounted in the books of both the parties. In view of the above, the entire addition of Rs. 17,00,000/- as a sale transaction was a mere speculation by the assessing officer and is required to be deleted in full. 19. We have heard the rival submissions and perused the material on record. The AO made two additions towards suppressed sale of scrap. The first addition is for an amount of Rs.32,04,000 based on the noting made on 3.2.2007 which is extracted in the earlier part of this order. The ld AR during the course of hearing drew our attention to the submissions made before the lower authorities stating that the MD has made note of a proposed import from SAIT (which is the short form for Society Africana D Immobilier Et De Transport) which is located in Republic of Senegal, which is supported by the ledger of SAIT produced for FY 2007-08 (page 146 of paper book) wherein the proposed purchased actually happened and the payment is made. We ITA No.81/Bang/2020 Page 12 of 18 also notice that State Bank of Hyderabad had confirmed the outward remittance to SAIT vide letter dated 30.12.2016 addressed to the CIT(A). We further notice that this submission of the assessee regarding factual position has not been considered by the lower authorities as whether the noting in the diary crystallized in the subsequent financial year and the addition is made merely based on the entries in the diary. We further notice that these transactions relate to import of materials from the vendor SAIT which is an expense in the hands of the assessee and from the records / ledger copies it is noticed this transaction has materialized in the subsequent financial year i.e. 2007-08. We therefore see merit in the argument that noting found in the diary are proposed imports which happened in the subsequent year. Further, the AO has made the addition as undisclosed income by sale of steel scrap, whereas based on facts submitted, the transaction is that of an import/purchase and hence the findings of the AO is factually incorrect. In view of this discussion and based on the perusal of the facts of the case, we are of the considered view that this addition is not tenable and therefore deleted. 20. With regard to the addition of Rs.17,00,000 the AO has done it based on the noting in the diary where it is mention as “Steel Scrap – Rs.17 lakhs”. The submission of the assessee that this is a projected receipt from sister concern and the amount was actually received in FY 2007-08 which was not accepted by the AO. The ld AR argued before us that the assessee does not sell any scraps and the noting is an expected receipt from the sister concern M/s.Ajay Constructions that ITA No.81/Bang/2020 Page 13 of 18 has sold the steel scrap. The ld AR drew our attention to the ledger copy of assessee’s account in the books of M/s.Ajay Constructions and the bank statement of M/s.Ajay Constructions where in an amount of Rs.20,00,000 is paid to the assessee on 20.07.2007. The ld AR submitted that this is the proposed receipt noted by the MD of the assessee which is received in the subsequent financial year. We notice that the AO while making this addition has stated that the amount noted as receivable should have been received on that day or any future date and that the assessee company has not furnished any evidence to show that such receipt was accounted in any future date either in the hands of the assessee or in the hands of any other sister concern. We find that this conclusion is arrived at not based on perusal of any materials produced before the AO. We also notice that the CIT(A) has upheld the addition merely on the basis that the during AY 2006-07 also similar issue is noticed and the unaccounted income arising out of the business transaction needs to taxed. The CIT(A) has not recorded any finding based on the details submitted and has not brought anything on record to state that the details submitted are not correct. The CIT(A) has instead decided on the earlier year which in our view is not the right way to arrive at the decision. The assessment of each year is different and have to considered based on the facts pertaining to that particular assessment year. The submission of the ld AR that the noting of Rs.17,00,000 relates to the subsequent receipt of Rs.20,00,000 needs to be examined, though there is no other payment received from M/s.Ajay Constructions for FY 2007-08. The receipts if ITA No.81/Bang/2020 Page 14 of 18 any from M/s.Ajay Constructions to the assessee during the year under consideration also needs to be verified before accepting the contention of the ld AR. In these circumstance and considering the facts of the case, we remit the issue back to the AO for examination of the submissions afresh based on ledger and other documents submitted by the assessee. The assessee is directed to submit the relevant details before the AO and cooperate with the proceedings. It is ordered accordingly. 21. The AO called on the assessee to explain the various notings done in the diary and based on the reply filed by the assessee the AO found the following entries to be not acceptable. Sl. No . Date Description Amount (Rs.) Explanation offered 1 24 -10-06 Paid to Ashokkumar 10000 Could not remember. Seems to be personal expenditure. 2 24-10-06 Paid to deliver the M/C 15000 Could not recollect. 3 05-12-06 Bagri 25000 Planned to pay Mr. Naresh bagri at Mumbai for some local work but paid later. 4 09-12-06 Satish Model – New Year 27000 Cannot recollect the event. 5 21-12-06 Krishna Steel Industries 499180 This is Kanishka Steel co. industries ltd of Chennai payment to be received in our sister concern M/s Ajay Constructions. 6 27-02-07 VBM shipping 36000 No comments offered. 7 19-03-07 Chamarajnagar 27000 Being out of pocket expenses at Chamarajanagar, Sister Concern (REPL) recorded. ITA No.81/Bang/2020 Page 15 of 18 8 19-03-07 Hoskote 25000 Cash planned to be sent to Hoskote factory. TOTAL 664180 22. The AO treated the above amount as unexplained expenditure u/s. 69C on the basis that the expenditure were not entered in the books of accounts of the assessee and that the explanation provided by the assessee that these expenses pertained to sister concerns was not acceptable. On further appeal, the assessee filed details pertaining to these expenses before the CIT(A). The CIT(A) did not admit the additional evidence filed by the assessee and confirmed the addition. 23. The ld. AR submitted that the additions in respect of miscellaneous entries are stated in the assessment order along with the comments of the assessee. The ld AR further submitted that a substantial portion of the entries were either personal expenditure of the director of the assessee or transactions made in the personal capacity of the director and not related to the primary activities of the assessee. The monies receivable from Kanishk Steels, Chennai, of Rs. 13,60,485/- were an actual outstanding arising out of sale of goods during the earlier year and the same was a closing balance (page 168 of paper book) in the books of the assessee and received through banking channels in the following assessment year. Further, the transactions of the director with the sister concerns of the assessee, were stated to be recorded in their respective books and the same could not have been added as unexplained in the hands of the assessee. It was further submitted that the learned CIT(A) has also given a perverse finding ITA No.81/Bang/2020 Page 16 of 18 that the assessee has furnished additional details and filed for the first time, which is contrary to record, when the details of the transaction were explained to the AO during assessment proceedings and thus the additions ought to have been deleted by the CIT(A). 24. Without prejudice, the ld. AR submitted that the payments for personal purposes would be paid from the personal resources of the director and could in no instance be considered as payments made by the assessee. Hence, no addition could have been made in the hands of the assessee in respect of the various working notes made by the director of the assessee for mere reason that he was the managing director of the assessee, when the said entries have been sufficiently explained to been made by the director individually or were mere working notes for financial planning purposes. 25. We have heard the rival submissions and perused the material on record. We notice that the AO had given a list of various noting from the diary and based on the details furnished made the addition in the hands of the assessee for an amount of Rs.6,64,180. We also notice that during the appellate proceedings the assessee has filed certain documents related to these amounts and also submitted that sum of these are personal expenses noted in the diary or expenses not pertaining to the assessee. However the CIT(A) rejected these documents by stating that the assessee has not submitted the same before the AO inspite of having sufficient opportunity and did not provide sufficient cause for his failure to furnish these documents ITA No.81/Bang/2020 Page 17 of 18 before the AO. On this ground the CIT(A) upheld the addition. The ld AR during the course of hearing submitted that the major amount of Rs.4,99,000 does not belong to the assessee and belongs to some other entity. The ld AR in this regard drew our attention to pg 168 of paper book where the relevant document to substantiate the said claim and submitted that the same was furnished before the lower authorities. Since the CIT(A) did not admit the documents to arrive at the decision to uphold the addition and that the assessee’s contention that the amounts are either personal in nature or does not belong to the assessee need to be factually examined. Since the AO has stated that the assessee has not furnished any details before him to support the claim in the interest of justice, we remit the issue back to the AO. The AO is directed to consider the evidences and documents and decide the issue afresh after examination in accordance with law. Needless to say that the assessee may be given a proper opportunity of being heard. 26. In the result, the appeal by the assessee is partly allowed. Pronounced in the open court on this 11 th day of November, 2022. Sd/- Sd/- ( BEENA PILLAI ) ( PADMAVATHY S. ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 11 th November, 2022. /Desai S Murthy / ITA No.81/Bang/2020 Page 18 of 18 Copy to: 1. Assessee 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.