KAVITA GODBOLE,MUMBAI vs. ITO CIR 18(1)(4), MUMBAI

The captioned four appeals by the Assessee pertain to assessment years 2005-06, 2006-07, 2008-09 and 2009-10 and since they involve certain common issues, they have been clubbed, heard together and a consolidated order is being passed for the sake of convenience and brevity.

In so far as the appeals for the assessment years 2005-06, 2006-07 and 2008-09 are concerned, a preliminary common issue has been raised by the Assessee, challenging the validity of the assessment made by the Assessing Officer. Since it was a common point between the parties that the facts and circumstances are identical in the three years, we may take-up the appeal for the assessment year 2005-06 as a lead case.

The appeal for the assessment year 2005-06 is directed against the order of the CIT (Appeals)-29, Mumbai, which in turn, has arisen from an order passed by the Assessing Officer u/s 143(3) r.w.s. 147 of the Act dated 30.12.2011.

In brief, the relevant facts are that the Assessee is an individual who is, inter alia, engaged in the business of trading in garments, commission and consultancy. For the assessment year 2005-06, the Assessee filed a return of income on 24.10.2005 declaring a total income of Rs.5,57,934/-. Subsequently,

In the ensuing assessment, the total income has been determined at Rs.28,06,740/- by making three additions to the returned income. Firstly, the Assessing Officer perused the Balance Sheet of the Assessee and noted loans of Rs.24,04,115/- out of which he treated the loan from three parties of Rs.9,24,000/- as unexplained credits u/s 68 of the Act. Secondly, the Assessing Officer examined the financial statement of the proprietary concerns of the Assessee and recorded that Assessee could not produce supporting documents of purchases or expenses shown therein. The total cash sales shown by the Assessee was treated as unexplained money and the opening stock of 4 and 6918/Mum/2014 SA Nos.210-212/Mum/2017 Ms. Kavita Godbole Rs.12,84,640/- was treated as Nil thereby resulting in addition of Rs.12,84,640/-. Thirdly, the Assessing Officer disallowed 20% of the expenses claimed in Profit & Loss account thus making addition of Rs.40,168/-.

Before us, the Ld. Representative of the Assessee pointed out that the aforesaid three additions made to the returned income were not forming part of the reasons recorded for issuance of notice u/s 147/148 of the Act. It has been pointed out that in the final assessment, the Assessing Officer has not made any addition with respect to the income referred to in the reasons recorded for issuance of notice u/s 147/148 of the Act. Therefore, it is contended that the Assessing Officer has no jurisdiction to make the aforesaid three additions and for that proposition, reliance has been placed on the judgement of the Hon’ble Bombay High Court in the case of CIT Vs. Jet Airways (I) Ltd. [331 ITR 236 (Mum)].

On the other hand, the Ld. DR appearing for the Revenue has defended the order of the Assessing Officer to make the impugned additions, by pointing out that the income referred to in the reasons recorded pertain to investment in a flat at Adarsh Cooperative Housing Society Ltd and it is only in the course of such verification that the aforesaid issues came to the notice of the Assessing Officer.

We have carefully considered the rival submissions. The crux of the controversy before us revolves around the scope of the power of the Assessing Officer to make additions, when reassessment has been initiated by issuance of 5 and 6918/Mum/2014 SA Nos.210-212/Mum/2017 Ms. Kavita Godbole notice u/s 147/148 of the Act. In the present case, as the reasons recorded for issuance of notice u/s 148 shows, the assessment was reopened in order to verify the investment made by the Assessee of Rs.5,00,000/- for the flat at Adarsh Cooperative Housing Society Ltd. Factually speaking, in the ensuing assessment, which is the subject matter of controversy before us, the aforesaid income has not been assessed, which implies that the explanation furnished by the Assessee was found satisfactory. The Assessing Officer has made three other additions, which we have detailed earlier. The question is whether the Assessing Officer has the power to assess such other incomes in a situation where he has not assessed the income, which had prevailed with him to form an opinion of escapement of income in the reasons recorded for initiation of proceedings u/s 147/148 of the Act. An identical situation has been considered by the Hon’ble Bombay High Court in the case of Jet Airways (I) Ltd (supra). In the case before Hon’ble High Court, the question of law raised was as under : "Where upon the issuance of a notice under section 148 of the Income-tax Act, 1961 read with section 147, the Assessing Officer does not assess or, as the case may be, reassess the income which he has reason to believe had escaped assessment and which formed the basis of a notice under section 148, is it open to the Assessing Officer to assess or reassess independently any other income, which does not form the subject-matter of the notice ?”

According to the Hon’ble High Court, after considering Explanation 3 to Section 147 of the Act, inserted by the Finance (No.2) Act of 2009, w.e.f. 1.4.1989, the Assessing Officer can assess other incomes not referred to in the notice of the reassessment only if the income referred to in the notice of reassessment has been brought to tax. In this context, the following discussion in the Hon’ble High Court is worthy of notice :-

Following the ratio of the above judgement of the Hon’ble Bombay High Court, it has to be held that in the present case, the Assessing Officer was precluded from making the aforesaid 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 Rs.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. We hold so.

Before parting, we refer to the argument raised by the Ld. DR which is essentially based on the reasoning taken by the CIT (Appeals) in para 19 of his order. As per the CIT (Appeals), even if the Assessing Officer did not make an addition on account of investment in flat amounting to Rs.5,00,000/-, the impugned reassessment does not get vitiated because the three additions in question are part of the investigation carried out by the Assessing Officer in relation to the investment in flat at Adarsh Cooperative Housing Society Ltd. In our considered opinion, the aforesaid reasoning is untenable in view of the law

In the result, as far as the appeal for assessment year 2005-06 is concerned, the same is allowed, as above.

It was a common point between the parties that so far as the assessment years 2006-07 and 2008-09 are concerned, the facts and circumstances are pari materia to those considered by us in earlier paras in the appeal for assessment year 2005-06 and therefore our decision in the appeal for the assessment year 2005-06 applies mutatis mutandis in the appeal for the assessment years 2006- 07 and 2008-09. As a consequence, the appeals of the Assessee for the assessment year 2006-07 and 2008-09 are allowed, as above.

Now, we may take up the appeal of the Assessee for the assessment year 2009-10 which is directed against the order of the CIT (Appeals) which in-turn, has arisen out of the order passed by the Assessing Officer u/s. 143(3) of the Act dated 30.12.2011. In this appeal, Assessee has raised three grounds of appeal which we shall deal in certainty.

Before us, the Ld. Representative for the Assessee has taken us through the affidavit of the mother and pointed out that she has been advancing monies to the Assessee during the period 2001 to 2011 as loans. By way of affidavit dated 26.11.2011, the said loans were converted into gifts to the Assessee. Accordingly, the Ld. Representative pointed out that the sum of Rs.5,00,000/- in question was explained to be in the nature of gift received from the mother of the Assessee.

On the other hand, the Ld. DR appearing for the Revenue has defended the orders of the authorities below by pointing out that the Assessee has neither established the credit worthiness of the donor and nor the genuineness of the transaction.

We have carefully considered the rival submissions. In the context of the impugned sum of Rs.5,00,000/- the explanation of the Assessee is purely based

The next issue raised by the Assessee is with regard to the addition of Rs.3,93,445/- made by the Assessing Officer as ‘deemed dividend’ within the meaning of section 2(22)(e) of the Act. The Assessing Officer noted that the Assessee had received a loan from M/s Apeksha Impex Pvt. Ltd to the tune of Rs.3,93,445/- which was to be assessed as ‘deemed dividend’ in terms of section 2(22)(e) of the Act since Assessee was one of the shareholders in the said company having 25% of the voting powers. The CIT(Appeals) has also affirmed the stand of the Assessing Officer.

In our considered opinion, the aforesaid plea of the Assessee is not tenable in as much 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) of the Act by the Assessing Officer, in principle. With regard to the quantum of amount assessable u/s 2(22)(e) of the Act, 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 Rs.6,52,674/- cannot be construed an amount received during the year, and thus the same cannot be assessed u/s 2(22)(e) of the Act in this year. The Assessing Officer has assessed an amount of Rs.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) of the Act is a sum of 11 and 6918/Mum/2014 SA Nos.210-212/Mum/2017 Ms. Kavita Godbole Rs.1,50,000/- advanced to the Assessee on 17.7.2008 as is evident from the statement of account placed at page 9 of the Paper Book. Therefore, we direct the Assessing Officer to restrict the addition on account of deemed dividend under section 2(22)(e) of the Act to Rs.1,50,000/- as against Rs.3,93,445/- made by him. Thus, on this aspect, Assessee partly succeeds.

The last issue in this appeal is with regard to an adhoc disallowance made out of the expenses debited to the Profit and Loss Account on account of the telephones, car, computer expenses etc. The Assessing Officer disallowed 20% of the total expenses, being Rs.18,662/- and the same has been reduced by the CIT(Appeals) to 10%. 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.

The appeal for the assessment year 2009-10 is, thus, partly allowed.

In the result, the appeals for the assessment years 2005-06, 2006-07 and 2008-09 are allowed, and that for the assessment year 2009-10 is partly allowed.