Commissioner of Income Tax vs Trimurti Builders

This appeal is directed against an order passed by the Tribunal, Indore Bench, Indore Annex. A/3 dt. 29th May, 2009 by which the second appeal preferred by the assessee was allowed and the Tribunal found that there was no sufficient material before the AO for reopening of the assessment under ss. 147 and 148 of the IT Act. The learned counsel appearing for the appellant submitted that the AO and the CIT(A)-1, Bhopal both have found that there was sufficient material for reassessment under s. 148 of the IT Act. The CIT(A)-I in para 2 of the order found that there was sufficient material before the AO for reopening of the assessment and to reassess the assessee. It is submitted that the Tribunal erred in reversing the aforesaid findings. It is further submitted by Shri Lal that substantial question of law No. 3 as framed in the memo of appeal arises for consideration of this Court.

To appreciate the aforesaid contention, we have perused the order passed by the three authorities. The asst. yr. 2001-02 is involved in the matter. The respondent was assessed under s. 143(1) of the IT Act in respect of the return filed by the assessee on 5th Oct., 2001, which was accepted by the Department.

Thereafter the AO found that there were certain points for reopening of the aforesaid assessment under s. 147 of the Act and directed issuance of the notice under s. 148 of the IT Act. The assessee objected that there were no sufficient reasons for reassessment. However, the contention of the assessee was turned down and the assessment was reopened. The AO after disallowing the expenses of Rs. 7,95,271 enhanced the income of the assessee and directed for reassessment of the income.

Against the aforesaid order, the assessee preferred an appeal before the CIT(A)-I, Bhopal, which was dismissed vide order dt. 17th Feb., 2006. Second appeal preferred by the assessee before the Tribunal, Indore Bench, Indore was heard and decided by the impugned order. The Tribunal considered the entire matter and found that there was no justification for the AO to reopen the assessment and set aside all the reassessment proceedings. This order is under challenge in this appeal.

To appreciate the contention of the appellant, we have perused the order. In order Annex. A/1, the AO considered the objection of the assessee in para 6, he observed as under :

The reply of learned Authorised Representative is considered, however it is not acceptable as it is evident that there is no business in this year and no proof to show that earlier businesses were going on. Hence no business expenses claimed can be allowed. Hence there is an underassessment of income by Rs. 7,95,271 which is added back to the income of the assessee. Initiate penalty under s. 271(1)(c) of the IT Act.

Before the CIT(A), the same contentions were agitated. The CIT(A) in para 2 of the order held as under :

I have considered the submissions of the learned counsel that reassessment proceedings were not validly initiated and there was no justification for initiating such proceedings. I have also perused the assessment order. After due consideration in the matter I hold that there was prima facie case for issue of notice under s. 148 in the case of the appellant. AO had legal justification and had reasons to believe that income chargeable to tax has escaped assessment. Therefore in my considered view AO has validly and lawfully initiated reassessment proceedings in the case of the appellant. He had complied with all the requirements of law. I therefore uphold the action of the AO. Thus Ground No. 1 is decided against the appellant.

By the aforesaid order, the CIT(A) turned down the contention of the assessee that there was no sufficient material for reopening of the assessment.

The Tribunal considered this aspect by the impugned order in paras 10 and 11 and found that there was absolutely no material before the AO for reopening of the assessment. For ready reference we quote paras 10 and 11 of the aforesaid order :

Considering the facts of the case in the light of material available on record, it is clear that the AO recorded reasons for reopening the assessment that expenditure is claimed when assessee had no business income. This reason is not relevant because there could be loss as well in the business. Learned counsel for assessee filed copy of the assessment order for asst. yr. 1998-99, dt. 31st Oct., 2003 passed under s. 143(3)/148 of the IT Act in which the nature of business of assessee is shown to be building construction and sales as is stated in the assessment year under appeal. The assessee filed return at loss of Rs. 98,510 and the AO disallowed some of the business expenditure. It would prove that assessee was doing business of building construction and sales in the earlier years also. Learned counsel for assessee also filed copy of the acknowledgement of the filing of the return for subsequent asst. yr. 2002-03 in which in the P&L a/c, assessee has shown contract receipts and claimed doing the similar business activities. In the assessment year under appeal, the assessee has claimed in the P&L a/c the deduction of the expenditure on account of electricity expenses, miscellaneous expenses, office expenses, petrol and conveyance, repairs and maintenance, salary to partner and staff, telephone and travelling expenses and office rent etc. which are related to the business activities of the assessee. The AO in the assessment order has not disputed genuineness of these expenditures. Thus, the AO has not doubted the existence of the business of the assessee in the assessment year under appeal. It would show that there was continuation of business activity of the assessee from the earlier years till the subsequent assessment years without any break in the business of the assessee. It is not always necessary on doing business activity, there should be earning of the income because there could be loss as well. The finding of the AO that no proof is filed to show earlier business was going on is, therefore, incorrect. There is absolutely nothing on record to show that assessee had any intention to cease to do similar business in the assessment year under appeal. There is no evidence on record that assessee carried on any other business in the year under appeal. The authorities below have not taken into consideration that in the earlier years and subsequent years, assessee was doing the same business. It is, therefore, not possible to hold that by mere lull in activity of assessee, it had ceased to do business. The reasons for reopening of the assessment under s. 147 that there was no business income, so no expense is allowable is irrelevant criteria for reopening the assessment. Thus, there was no material or basis to reopen the assessment. The assessee has filed computation of income which shows that income from business and profession has been separately computed showing business loss and further income from house property is computed and thereafter, the assessee claimed set off of business losses against the income from house property as per provision of s. 71 of the IT Act. The authorities below have not given any adverse finding against the assessee on this computation. Thus, the whole basis of the AO to reopen the assessment is incorrect and without any basis. In the facts and circumstances of the case, the assessee would be entitled for claim of expenditure even if no business income is earned in the assessment year under appeal due to continuation of business of the assessee.

The decisions cited by the learned Departmental Representative noted above would not support the case of the Revenue in any manner. The learned Departmental Representative heavily relied upon Expln. 2(b) to s. 147 of the Act which is also considered by the Hon''ble High Court of Madras in the case of ITO vs. KM. Pachiappan (supra). However, in the aforesaid decision the Hon''ble High Court of Madras considering the provisions of s. 147 noted that the conditions precedent for proceedings under s. 147 are that the AO should have reason to believe that the income has escaped assessment. It is not necessary that the assessment should have been completed under s. 143(3) of the Act before it could be reopened. Expln. 2(b) to s. 147 specifically provides the cases where the AO noticed that the assessee has understated the income in the return of income. The word ''noticed'' used in Expln. 2(b) of s. 147 of the IT Act is vital and significant in the sense that there should be some basis upon which the belief can be built by the AO. It does not matter whether the belief is ultimately proved right or wrong but there must be some material upon which some belief can be founded. In the present case, we have noticed as a fact that there was no material on record upon which the AO could have based his belief that the income has escaped assessment. The learned Departmental Representative merely submitted that the information contained in return is sufficient for the AO to form his belief that the income has escaped assessment. We do not agree with the submission of the learned Departmental Representative because in the absence of any material or information on record, the AO merely had reason to suspect that the business expenditure is not allowable when there is no business income. There was no material on record to support the belief of the AO. Thus, it is a case where there was no material or information or basis available to the AO to form his belief that the income, chargeable to tax has escaped assessment on account of inadmissible expenditure for want of business income. The AO never doubted existence of business of assessee as well as did not dispute genuineness of expenditure for which assessee claimed deduction. Therefore, it is not a fit case for reopening the assessment or to disallowance business expenditure in the facts and circumstances of the case as noted above.

From the perusal of the aforesaid, it is apparent that the Tribunal considered the entire matter and found that in the relevant year, there was loss to assessee and the expenses for business were claimed by the assessee which were earlier allowed by the AO. There was no other material for the AO for reopening of the assessment and found that the reopening of the assessment on the same material, was unjustified.

We have perused the order and found that there was no fresh material available before the AO and the material which was already produced at the time of assessment was taken into consideration by the AO at the time of original assessment. In view of the aforesaid, we do not find any error in the order passed by the Tribunal. This appeal is without merit. No substantial question of law arises for consideration of this Court. This appeal is dismissed at admission stage with no order as to costs.