2021 (3) TMI 1477 - AT - Income Tax

Estimation of income based only on statement recorded during the survey - HELD THAT - Hon ble Bombay High Court in the case of Nirmala L. Mehta vs. A. Balasubramaniam 2004 (4) TMI 43 - BOMBAY HIGH COURT held that there cannot be any estoppel against the statute. Article 265 of the Constitution of India in unmistakable terms provides that no tax shall be levied or collected except by authority of law. Acquiescence cannot take away from a party the relief that he is entitled to where the tax is levied or collected without authority of law. We are of the opinion that the estimation of income based only on statement recorded during the survey cannot be sustained. Accordingly we delete the addition on this count. This ground of appeal is allowed. Disallowance u/s. 36(1)(iii) - investment of interest bearing borrowed funds in the sister concern - DR submitted that the assessee diverted interest bearing funds in these assessment years as such disallowance u/s. 36(1)(iii) has to be confirmed - HELD THAT - As held in the case of S.A. Builders 2006 (12) TMI 82 - SUPREME COURT once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. In our opinion when the money advanced to its sister concern was for the purpose of business interest on such advances cannot be disallowed. Accordingly we allow this ground taken by the assessee. Scrutiny assessment u/s. 143(3) r.w.s. 147 without issue of mandatory notice u/s. 143(2) - annulled assessment - HELD THAT - In the present case it is to be noted that there was no valid issue of notice u/s. 143(2) of the Act. Therefore the assessment order framed thereafter is bad in law as held by the Hon ble Supreme Court in the case of CIT v. Hotel Blue Moon 2010 (2) TMI 1 - SUPREME COURT wherein it was held that issue of legally valid notice u/s. 143(2) is mandatory for assuming jurisdiction to frame scrutiny assessment u/s. 143(3) of the Act and absence of a valid notice u/s. 143(2) is not a curable defect. Reasons to believe - There is no allegation in the reasons recorded for reopening the assessment by the AO that there is a failure on the part of assessee to disclose fully and truly all material facts necessary for assessee s assessment for the impugned assessment year. Being so reopening is bad in law. The impugned notice having been sent for booking through speed post centre only on 4.7.2017 the date of issue of such notice would be 4.7.2017 only and not 27.3.2017 or 27.6.2017 which is clearly beyond 6 years from the end of relevant assessment year 2010-11 i.e. 31.3.2011 which is barred by limitation and cannot be sustained. Accordingly we are of the opinion that reassessment framed vide notice dated 148 dated 27.3.2017 is bad in law. Notice u/s. 148 dated 21.11.2016 was issued prior to the date of obtaining approval from the competent authority which was accorded on 23.3.2017 - second notice u/s. 148 issued - Notice u/s. 148 dated 21.11.2016 was issued prior to the date of obtaining approval from the competent authority which was accorded on 23.3.2017. See The Archdiocesan Board of Education 2019 (7) TMI 2036 - ITAT BANGALORE Being so in our opinion no further notice for reassessment could be issued unless an earlier notice u/s. 148 was culminated by framing assessment or closing the further action for framing assessment in accordance with law. Accordingly we are of the opinion that the second reassessment notice issued on 148 on 4.7.2017 cannot be proceeded with and the assessment framed consequent to this notice is bad in law. Whether notice u/s. 148 has been issued only on change of opinion since all the issues are considered in the original assessment ? - We have heard both the parties on this issue. The issue taken up by the AO in reopening assessment is with regard to low net profit margin and disallowance of interest on account of diversion of funds to sister concern Smilex Labs Pvt. Ltd. These issues are not subject matter of original assessments being so it cannot be said that there is change of opinion to reopen the concluded assessment on the basis of notice u/s. 148 of the Act.

Summary

The core legal questions considered in these appeals relate primarily to the validity and maintainability of reassessment proceedings under the Income-tax Act, 1961, specifically concerning the reopening of assessments under section 147 read with section 148, and the correctness of additions made by the Assessing Officer (AO) on the basis of estimated profits and disallowance of interest under section 36(1)(iii). The issues can be broadly categorized as follows:

1. Whether the reassessment notices issued under section 148 were validly issued within the prescribed limitation period and with proper approval from the competent authority.

2. Whether the mandatory notice under section 143(2) was issued before completing scrutiny assessments under section 143(3), and the consequences of its non-issuance.

3. Whether the AO was justified in estimating the income of the assessee by adopting an 8% net profit margin based on voluntary statements recorded under sections 133A and 131 during survey proceedings, despite the assessee maintaining audited books of account.

4. Whether the disallowance of interest under section 36(1)(iii) on borrowed funds allegedly diverted to a sister concern was justified.

5. Whether the reopening of assessment was based on change of opinion or on tangible material indicating escapement of income.

6. Admissibility of additional grounds raised by the assessee challenging the reassessment proceedings.

Issue-wise Detailed Analysis

1. Validity of Reassessment Notices under Section 148 and Approval by Competent Authority

The reassessment notices for the assessment years (AYs) 2010-11 to 2015-16 were challenged on grounds that they were issued beyond the limitation period prescribed under section 149 of the Act and/or without proper approval from the competent authority as mandated under section 151. The assessee contended that the notices dated 27.3.2017 were dispatched after the expiry of the six-year limitation period from the end of the relevant AY (for AY 2010-11, limitation expired on 31.3.2017), rendering the notices time-barred and invalid.

The AO's records showed discrepancies regarding the date of dispatch of notices; though signed on 27.3.2017 and allegedly dispatched on 27.6.2017, the actual dispatch to the assessee was on 4.7.2017, beyond the limitation period. The Tribunal relied on judicial precedents holding that the date of issue of notice under section 148 is the date on which it is dispatched to the assessee, not the date of signing or internal approval. Consequently, notices dispatched beyond the limitation period were held invalid.

Further, the Tribunal examined the approval for issuance of notices. It was noted that in several instances, notices were issued before the approval was granted by the competent authority, which is a mandatory pre-condition. In particular, notices dated 21.11.2016 were issued prior to approval dated 23.11.2016 or 24.3.2017. The Tribunal held that issuance of notice without prior valid approval is bad in law, rendering the assessment framed thereon void.

In addition, the Tribunal considered the issuance of multiple notices under section 148 for the same AY without culmination of the earlier notice by framing assessment or closing proceedings. It was held, following binding precedents, that the law does not recognize two parallel reassessment proceedings. Therefore, a second notice issued during the pendency of the first notice is invalid.

2. Non-issuance of Mandatory Notice under Section 143(2) before Scrutiny Assessment

The assessee raised the ground that the AO failed to issue mandatory notice under section 143(2) before completing scrutiny assessments under section 143(3) read with section 147. The Tribunal extensively examined the procedural records and order sheets. It was found that though notices dated 26.9.2017 were recorded as issued, no physical copy of such notices was produced, and there was inconsistency in hearing dates mentioned in notices and order sheets. The Tribunal referred to binding Supreme Court precedents which held that issuance of notice under section 143(2) is mandatory for assuming jurisdiction to complete scrutiny assessment under section 143(3), and non-issuance renders the assessment non-est in law and void.

The Tribunal further analyzed section 292BB, which deems notice to be valid if the assessee has appeared or cooperated in proceedings, but clarified that this provision does not cure complete absence of notice. Since no valid notice was served, the assessments for the relevant years were quashed on this ground.

3. Estimation of Income by Adopting 8% Net Profit Margin Based on Voluntary Statements

The AO, relying on statements recorded under sections 133A and 131 during survey, estimated the net profit margin at 8% of turnover, which was higher than the profit declared by the assessee in its returns. The assessee argued that it maintained regular books of account audited under section 44AB, and the AO erred in rejecting the same without any corroborative evidence.

The Tribunal referred to the Supreme Court decision in CIT v. Khader Khan & Sons, which held that additions cannot be made solely on voluntary statements without material evidence indicating irregularity of accounts. The Tribunal concluded that the AO's estimation based only on voluntary statements was unsustainable and deleted the additions made on this basis.

4. Disallowance of Interest under Section 36(1)(iii) on Borrowed Funds Diverted to Sister Concern

The AO disallowed interest expenses on borrowed funds allegedly diverted to sister concern Smilex Labs Pvt. Ltd., holding that the funds were not used for the assessee's business. The assessee contended that the investments were for business purposes and commercial expediency, supported by inter-related business transactions with the sister concern.

The Tribunal relied on the Supreme Court ruling in S.A. Builders Ltd., which expanded the meaning of "for the purpose of business" to include expenditure incurred for commercial expediency, even if benefiting a third party. The Tribunal held that the AO failed to appreciate this principle and did not properly examine the purpose of the advances. Since the advances were for business expediency, the interest disallowance was not justified and was accordingly deleted.

5. Reopening Based on Change of Opinion vs. Escapement of Income

The assessee argued that the reassessment was based on mere change of opinion as the issues of low net profit margin and interest disallowance were not part of the original assessment. The Tribunal observed that these issues were not considered in the original assessments and thus did not constitute reopening on mere change of opinion, which is impermissible. However, since the reassessment notices were invalid on other grounds, this issue did not require further adjudication.

6. Admission and Adjudication of Additional Grounds

The assessee filed additional grounds challenging the validity of notices under section 148 and non-issuance of notice under section 143(2). The Tribunal admitted these grounds as they went to the root of the matter of reopening assessments. The Tribunal relied on Supreme Court precedents including National Thermal Power Corporation and Hotel Blue Moon to hold that non-compliance with mandatory procedural requirements vitiates the reassessment proceedings.

Significant Holdings

"Additions cannot be made merely on the basis of voluntary statement without any material evidence as to irregularity of account books or any other relevant evidence."

"Officers of the department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a tax payer in every reasonable way..." (CBDT Circular No. 14(XL-35) of 1955)

"If a particular income is not taxable under the Income-tax Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. Equity is out of place in tax law..." (Supreme Court)

"The expression 'for the purpose of business' includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby." (S.A. Builders Ltd.)

"Issue of legally valid notice under section 143(2) is mandatory for assuming jurisdiction to frame scrutiny assessment under section 143(3), and absence of such notice is not a curable defect." (Supreme Court in Hotel Blue Moon)

"The date of issue of notice under section 148 is the date on which the notice is actually dispatched to the assessee, and not the date of signing or internal approval." (Tribunal relying on High Court precedents)

"The law does not recognize two parallel assessments. In absence of withdrawal of the first notice of reassessment, the proceedings pursuant to the second notice are invalid." (Gujarat High Court)

Final Determinations

The Tribunal allowed the appeals primarily on procedural grounds, holding that reassessment notices issued beyond limitation, without valid approval, or without issuance of mandatory notice under section 143(2), were invalid and assessments framed thereon were void. The additions made by estimating income based on voluntary statements were deleted for lack of corroborative material. The disallowance of interest under section 36(1)(iii) was deleted as the advances to sister concern were for commercial expediency and thus for business purposes. The Tribunal admitted additional grounds challenging the reassessment process and relied on binding judicial precedents to quash the reassessments for the AYs 2010-11 to 2015-16, except for some appeals which were partly allowed due to factual variations.