SABINA HUSEINALLY BAHANVATY,MUMBAI vs. ITO WD 19(3)(4), MUMBAI

This is an appeal filed by the assessee against the order of CIT(A)- 18, Mumbai dated 20/11/2012 for A.Y.2003-04 in the matter of order passed u/s.143(3) r.w.s. 147 of the IT Act. 2. In this appeal, assessee is aggrieved for reopening of assessment as well as addition made on account of disallowance of compensation and extra profit assessee should have earned from sale of products to M/s. Abbasali. 3. Rival contentions have been heard and record perused.

In consideration of the above, the assessee offered minimum guaranteed gross profit assurance of Rs.30 lacs per year and the assessee would make good for any shortfall arising to M/s. Abbasali's. Actual business transactions between the parties commenced from August 2002. The actual amount of purchase made by M/s. Abbasali's for the period from August 2002 to March 2003 aggregated to Rs.59,85,693/- and as against this, M/s. Abbasali's sold the products to various customers for aggregate turnover of Rs.74,73,405/-, thereby making gross profit of Rs.14,87,712/-. However, since the gross profit earned amounted to Rs.14,87,712/-, the difference amount of Rs.5,12,288/- was compensated by the assessee to M/s. Abbasali's, which is reflected in the profit and loss account of M/s. Abbasali's.

The case of assessee was scrutinized u/s.143(3) of the Act whereby the assessee has furnished the details called for including the break-up of month-wise sales and the break-up of monthly sales to various parties including M/s. Abbasali's from which it is clear that sales to M/s. Abbasali's started from the month of August 2002 and the total amount of sales aggregate to Rs.59,85,693/-. The AO passed assessment order u/s.143(3) of the Act dated 17.10.2005 wherein certain ad hoc disallowance were made.

The assessment was reopened u/s. 148 of the Act vide notice dated 28.03.2008 and reassessment order passed u/s. 147 r.w.s. 147 of the Act dated 12.12.2008 wherein the AO. (i) disallowed compensation paid to M/s. Abbasali's of Rs.5,12,288/- and (ii) computed amount of Rs.8,68,148/- as extra profit assessee should have earned from sale of products to M/s. Abbasali's.

Against reopening and merit of additions assessee approached to CIT(A). 9. CIT(A) dismissed the appeal of the assessee both on reopening of assessment as also on merits. Now assessee is in further appeal before us.

On the other hand, learned DR relied on the order of the lower authorities and contended that assessment was validly reopened after recording the reasons and after considering the assessee’s reply, the AO has made addition while framing assessment u/s.143(3) r.w.s. 147 of the IT Act.

Rival contentions have been heard and record perused.

From the record we found that the reopening of the assessment was based upon Audit objection. In this regard, the Bench had directed the Ld. DR to file the copy of audit objection and reply of the AO to the audit objection. The Ld. DR filed the copy of the Audit objection dated 09.03.2007 whereby the audit has objected to the allowability of Smt. Sabina Houseinally Vahanvaty compensation of Rs.5,12,288/-u/s.40A(2)(b) of the Act and also worked out by adopting some methodology and adopting incorrect figures to arrive at amount of Rs.8,68,148/- which the assessee should have earned extra from the sale of products to M/s. Abbasali's. One more issue was raised by Audit regarding inflation of purchases by Rs.9,75,407/-.

From the record we found that the AO filed reply to the Audit party vide letter dated 21.06.2007 rejecting the objections raised by the Audit vide para 2.1 of the letter, which is reproduced as under- "2.1 The above objection of the Audit is not acceptable. M/s. Abbas Alls was an newly opened firm to sell sports equipments. All the materials and sports equipments required were exclusively purchased from M/s. Zenabalis and all the products displayed and stored belonged to M/s. Zenabalis until such products were sold. As M/s Abbas Alis was totally new to business of sports equipments and it was displaying and selling exclusive equipments and products of M/s.Zenabalis, M/s. Zenabalis offered a minimum gross profit assurance at Rs.2.5 lac p.m. for initial two years. For the first year the operation were for 8 months and minimum profit assured amounted to Rs.20,00,000/-. The gross profit of M/s.Abbas Alis for this period was Rs.14,87,712/- and the shortfall of Rs.512288/- was paid by M/s. Zenabalis as per terms of agreement. From these terms of agreement it is clear that there was no diversion of profit. M/s.Abbas Alis was exclusively displaying and selling sports equipments of the assessee. As M/s.Abbas Alis was new to the business, the assessee offered minimum profit guarantee. The arrangement was totally a business arrangement based solely on commercial considerations. In this regard it is also stated that the AO cannot step into the shoes of the assessee and decide the business prudent on behalf of the assessee. It is for the assessee to take his business decisions. In this case as the transaction was at arm's length and was a pure commercial transaction, the objection of the audit that the assessee has diverted her profits is not accepted.”

We also observe that vide letter dated 21/06/2007 vide para 3, the AO has also rejected the objection of the Audit party in respect of purchases made from M/s. Zenabalis as inflated, however, thereafter, the Smt. Sabina Houseinally Vahanvaty very same AO who has rejected the audit objection issued notice u/s.148 for reopening the assessment. As per our considered view reopening is bad in law and liable to be quashed since the same is based upon Audit objection, which objection was categorically rejected by the AO holding very clearly that there was no diversion of profits as per the terms of the agreement and that the transaction was at arm's length and a pure commercial transaction. Having rejected the audit objection and satisfied that there was no income escaping assessment, the AO cannot once again turn around and reopen the case on the basis of same audit objection - in fact reasons recorded is verbatim copy of the audit objection. For this purpose reliance may be placed on the decision of Bombay High Court in the case of CIT v. Rajan N. Aswani [2018] 403 ITR 30 (Bom) wherein the facts as stated in page 33 of the order at para 3 are- "Mr. Mody, the learned counsel appearing for the respondent at the very outset points that the issue raised herein, namely, can a reopening notice be issued by the Assessing Officer on the very ground which he had opposed in response to the query from the audit is no longer res integra. It is submitted that the said issue stands concluded in favor of the respondent assessee by the decision of this court in ...." The Hon'ble Bombay HC in para 5 after rejecting the decision 16. referred by the revenue held - "This is completely different from the present facts where an assessee points out that the reasons recorded by the Assessing Officer are not his own reasons and therefore, the reopening notice issued under