SRI. H.P. BASAVARAJU,MYSORE vs. ITO, MYSORE

Appellant By : Shri S. Venkatesan, C.A. Respondent By : Shri Sunil Kumar Agarwala, JCIT (D.R) Date of Hearing : 1.9.2015. Date of Pronouncement : 9.10.2015. O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by the assessee is directed against the order of the CIT (Appeals), Mysore dt.26.2.2014 for Assessment Year 2008-09.

Phaneesh Granites Pvt. Ltd. on 31.10.2011, wherein the assessee was a Director. At the time of survey action, the Department noticed from documents found at the premises that the assessee had entered into a transaction vide Registered Sale Deed dt.23.7.2010 for sale of land at S.No.231/1, Bogadi village, Kasba Hubli, Mysore, in which the assessee was a confirming party. It was also noticed therefrom that the assessee had paid an advance of Rs.2,27,78,130 to one Sri Mohammed Ahmed, the land owner, as per sale agreement dt.18.7.2007. However, since the said land was not reflected in the assessee's balance sheet as on 31.3.2008, filed for Assessment Year 2008-09, the Assessing Officer initiated proceedings under Section 147 of the Act as he had reason to believe that failure to disclose this investment by the assessee had resulted in the assessee's income chargeable to tax escaping assessment for Assessment Year 2008-09. On the basis of the aforesaid reasons based on findings at the time of survey, the Assessing Officer issued notice under Section 148 of the Act dt.31.1.2012 to the assessee. The assessee in response thereto vide letter dt.9.2.2012, requested that the return of income filed earlier on 31.3.2009 be treated as filed in response to the notice under Section 148 of the Act. The Assessing Officer, however, required the assessee to file a return of income in response to notice issued under Section 148 of the Act, which was complied with by the assessee on 19.2.2012. The assessee did not ask for furnishing of the reasons recorded for initiation of assessment proceedings under Section 147 of the Act before the Assessing Officer. The Assessing Officer proceeded to complete the assessment under Section 143(3) rws 147 of the Act vide order dt.22.3.2013 wherein the assessee's income was determined at Rs.4,88,22,462 as against the returned income of Rs.53,58,850 in view of the following additions / disallowances :- 1. Interest and Other expenses disallowed. Rs.12,62,778 2. Vehicle Maintenance Expenses disallowed Rs.1,89,402 3. Negative cash balance Rs.2,98,176 4. Loans not confirmed Rs.2,03,13,256 5. Excess Asset Rs.9,50,000 6. Cash deposit- no source Rs.4,50,000 7. Advance to Mohd. Ahmed Rs.1,00,00,000 8. Credit in Bank Account Rs.1,00,00,000 In the aforesaid order of assessment, the Assessing Officer has made several additions / disallowances including a sum of Rs.1 Crore out of the advance given to Sri Mohammed Ahmed, which was considered as the investment / asset not declared by the assessee as per the reasons recorded for initiating assessment proceedings under Section 147 of the Act. This would imply, in other words, that the Assessing Officer had accepted a sum of Rs.1,27,78,130 of the advance of Rs.2,27,78,130 given to Sri Mohammed Ahmed vide sale agreement dt.18.7.2007 as only a sum of Rs.1 Crore was added back to the income of the assessee on this count. 2.2 Aggrieved by the order of assessment for Assessment Year 2008-09 dt.22.3.2013, the assessee preferred an appeal before the CIT (Appeals), Mysore. In the grounds raised before the learned CIT (Appeals), the assessee challenged the reopening of the assessment as well as the additions made by the Assessing Officer. The assessee also filed certain additional evidences vide letter dt.13.8.2013 seeking their admission and written submissions dt.8.11.2013. The learned CIT (Appeals) called for a remand report from the Assessing Officer on the submissions filed by the assessee. The Assessing Officer filed the remand report dt.21.11.2013 and the assessee filed the rejoinder thereto dt.23.12.2013 before the learned CIT (Appeals). 2.3 Taking into consideration, inter alia, the remand report of the Assessing Officer, the learned CIT (Appeals) disposed the appeal vide order dt.26.2.2014 allowing the assessee partial relief. In the impugned order the learned CIT (Appeals) deleted the following additions / disallowances :-

1. Interest and Other expenses disallowed. Rs.12,62,778 2. Vehicle Maintenance Expenses disallowed Rs.1,89,402 3. Loans not confirmed Rs.2,03,13,256 4. Excess Asset Rs.9,50,000 5. Advance to Mohd. Ahmed Rs.1,00,00,000

6. Credit in Bank Account Rs.1,00,00,000 Thus ultimately, the learned CIT (Appeals) sustained two additions (i) Rs.2,98,176 being negative cash balance and (ii) Rs.4,50,000 in respect of cash deposit in bank account. The learned CIT (Appeals) has deleted the addition of Rs.1 Crore in respect of the assessee's transaction with Sri Mohammed Ahmed and that was the ground on which the assessment proceedings under Section 147 of the Act was initiated by the Assessing Officer. The impugned order of the learned CIT (Appeals); deleting the additions / Assessing Officer, has become final as it appears the Revenue has not preferred any appeal before us in this regard. 3. Aggrieved by the order of the CIT (Appeals), Mysore dt.26.2.2014 for Assessment Year 2008-09, the assessee has preferred this appeal, raising the following grounds :- “

1. The order of the learned CIT (Appeals) in so far as it sustains additions impugned in the appeal before him and only allowing the appeal partly instead of totally is opposed to law, equity, eight of evidence, facts and circumstances of the appellant’s case.

2. The learned CIT (Appeals) ought to have held that the order of re-assessment is bad in law and void ab initio for want of requisite jurisdiction especially, the mandatory requirements to assume jurisdiction under Section 148 of the Act did not exist and have not been complied with and further the reopening was on the wrong ground and reason which would not induce any belief that income has escaped assessment and consequently, the re-assessment ought to have been cancelled by the CIT (Appeals). 3.1 Without prejudice to the above, the learned CIT (Appeals) has erred in sustaining the following additions. a) The amount deposited in bank account by the appellant on 13.3.2008 : Rs.4,50,000. b) Deficit cash balance on 5.4.2007 and 7.4.2007 : Rs.2,98,176 3.2 The learned CIT (Appeals) failed to appreciate the explanation that the appellant is the Managing Partner of 3 firms and Managing Director of 2 companies and has been the custodian of the funds of the above 3 firms and 2 companies and such funds used to be in his possession and control and he used to deposit such funds in his own bank account and in the bank accounts of the 3 firms and 2 companies, which are managed by him as and when required without passing corresponding entries in the books of accounts and under the factual matrix, there is no justification in rejecting the explanation for the deposit of the said sum in the bank tested on probabilities. 3.3 The rejection of the explanation is only on suspicion and surmise, assumptions and presumptions contrary to evidence, tested on probabilities and liable to be deleted.

4. Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies himself liable to be charged to interest under Section 234A, 234B 234C of the Act, which under the facts and in the circumstances of the appellant’s case deserves to be cancelled.

5. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.”

4. Grounds at S.Nos.1 and 5 are general in nature and not being urged before us, are rendered infructuous and accordingly dismissed. 5.1 Ground No.2 – In respect of this ground, the learned Authorised Representative for the assessee contended that the re-opening of the assessment is bad in law since the very foundation for assumption of jurisdiction is merely on suspicion and surmise. The learned Authorised Representative submitted that the mere fact that the assessee has made an advance of Rs.2,27,78,170 as per sale agreement dt.18.7.2007 does not mean that the same amounts to income of the assessee escaping assessment. It was submitted that the failure to show the amount in the Balance Sheet of the assessee did not warrant a presumption that the advances are given out of undisclosed income. The learned Authorised Representative submits that the said advances were given from various concerns where the assessee was a partner or director and the same was reflected in the financial statements of those concerns. The fact that the learned CIT (Appeals) had deleted the addition of Rs.1 Crore in respect of the transactions with Sri Mohammed Ahmed goes to show that the basis for reopening the assessment is absent. It was contended that the foundation for initiating reassessment proceedings under Section 147 Act must be on valid reasons that induced the belief and cannot be merely on suspicion, as was done in the case on hand. The learned Authorised Representative submitted that in view of the above, it is clear that the assessment made under Section 143(3) rws 147 of the Act requires to be cancelled and in support of this contention placed reliance on the decision of the Hon'ble Rajasthan High Court in the case of CIT Vs. Shri Ram Singh (2008) 217 CTR (Raj) 345 and of the Hon'ble Bombay High Court in the case of Jet Airways (I) Ltd. reported in 331 ITR 236 (Bom.). 5.2 Per contra, the learned Departmental Representative supported the impugned order of the learned CIT (Appeals), contending that the existence of reasons at the time of reopening the assessment was sufficient. He submitted that merely because the addition is deleted by the learned CIT (Appeals) later, on appeal, does not mean that the reopening of the assessment is bad in law. It was submitted that the assessee had not sought for the reasons recorded for reopening the assessment form the Assessing Officer during assessment proceedings. It was only before the learned CIT (Appeals) that the assessee sought for the reasons recorded and the learned CIT (Appeals) declined to interfere. It was submitted by the learned Departmental Representative that in view of the above, the reopening of the assessment by the Assessing Officer is justified. 5.3.1 We have considered the rival contentions and perused and carefully considered the material on record. Admittedly, the assessee did not seek the reasons recorded for initiation of assessment proceedings under Section 147 of the Act before the Assessing Officer and therefore there was no occasion for the Assessing Officer to make available the reasons to the assessee or to pass an order on the objections raised before him in this regard. The assessee however sought for the reasons before the learned CIT (Appeals), who refused to interfere in the matter. We find on perusal of the records that the Assessing Officer had material based on which he arrived at the belief that income of the assessee had escaped assessment; i.e. “the assessee had paid an amount of Rs.2,27,78,130 as advance to Sri Mohammed Ahmed the land owner, as per the sale agreement dated 18.7.2007. As per the schedules filed with the return of income, this amount of advance is not reflected in the Balance Sheet filed by the assessee. Hence income chargeable to tax had escaped assessment as mentioned in Section 147 of the Income Tax Act, 1961”. Considering the fact that the Assessing Officer had the aforesaid material based on which he arrived at the belief that income had escaped assessment, we hold that the learned CIT (Appeals) was justified in rejecting the plea of the assessee in this regard. In the factual matrix of the case, the existence of belief cannot be doubted as, in our considered view, the fact that the advance was not reflected in the assessee's Balance Sheet would be sufficient to induce the belief for escapement of income. In this view of the matter, we reject the objections of the assessee on this count. 5.3.2 At the same time, we are conscious of the fact that the very basis on which the re-assessment has been initiated (supra) does not now survive. The Hon'ble High Court of Rajasthan in the case of CIT V Shri Ram Singh (supra) held that it is only when, in proceedings under s. 147 the AO assesses or reassesses any income chargeable to tax, which has escaped assessment for any assessment year, with respect to which he had "reason to believe" to be so, then only, in addition, he can also put to tax, the other income, chargeable to tax, which has escaped assessment, and which has come to his notice subsequently, in the course of proceedings under s. 147—Once the AO came to the conclusion, that the income, with respect to which he had entertained "reason to believe" to have escaped assessment, was found to have been explained, his jurisdiction came to a stop at that, and he did not continue to possess jurisdiction, to put to tax, any other income, which subsequently came to his notice, in the course of reassessment proceedings, which were found by him, to have escaped assessment. A similar view has also been taken by the Hon'ble Bombay High Court in the case of CIT V Jet Airways reported in 331 ITR 236. 5.3.3 In the case on hand, the Assessing Officer reopened the assessment in respect of the income on account of advance given by the assessee for purchase of land and an addition of Rs.1 Crore was made by the Assessing Officer on this account while passing the re-assessment order. However the learned CIT (Appeals) deleted the said addition of Rs.1 Crore made by the Assessing Officer which was the reason for initiation of proceedings under Section 147 of the Act and the Assessing Officer has accepted the finding of the learned CIT (Appeals) and not preferred any appeal before the Tribunal.

Therefore, the Assessing Officer accepted the explanation furnished by the assessee in respect of their income. In view of the above, we hold that the additions sustained by the learned CIT (Appeals) in the impugned order i.e. (i) Rs.2,98,176 on account of negative cash balance and (ii) Rs.4,50,000 on account of cash deposits in the bank account would not now survive since they are made not on grounds on which the assessments were reopened. These two additions at (i) and (ii) are accordingly deleted.