2014 (3) TMI 648 - AT - Income Tax

Assessment re-opening upheld despite no income assessment; CIT(A) deletes additions, Tribunal orders re-examination.

The Tribunal upheld the validity of the re-opening of assessment for the years 2005-06 and 2006-07 based on the belief of income escapement, although no ... Validity of reopening of assessment u/s 147 of the Act – Held that:- There is difference in the quantum of 'Operational income' shown in the Profit and loss account and that was shown in the TDS certificates - The assessee has accounted for the reimbursable expenses incurred by it under the head 'Expenses recoverable Account', but the accounting practice was not examined by the AO during the course of original assessment proceedings - the validity of the re- opening of assessment has to be judged on the basis of reasons recorded by the assessing officer - Even if the belief about the escapement of income did not ultimately result in assessment of any income, still the re-opening of the assessment shall be held to be valid, if the existence of reasons for belief about escapement of income is accepted - the AO had reason to believe that the income chargeable to tax has escaped the assessment in both the years - Though the assessment of the assessment year 2005-06 was reopened beyond the period of four years, yet the same has to be upheld in view of the Explanation 1 to sec. 147 – thus, the order of the CIT(A) upheld – Decided against Assessee. Difference between the Operating income disclosed by the assessee and the amount shown in the TDS certificates – Held that:- The CIT(A) has deleted the addition in both the years on the basis of sample bills and the reconciliation statements furnished to him by the assessee - mere reimbursement of expenses on actual basis would not give rise to any income assessable in the hands of the assessee – the AO did not examine the books of account to satisfy himself about the veracity of the said claim put forth by the assessee – the practical position in conducting the business has not been appreciated by the AO – thus, the matter is remitted back to the AO for fresh adjudication – Decided in favour of Revenue. Issues:1. Validity of re-opening of assessment for assessment years 2005-06 and 2006-07.2. Addition made by Assessing officer regarding difference in operating income disclosed by the assessee.Issue 1: Validity of re-opening of assessmentThe Assessing officer re-opened the assessment for both years due to a difference between the operating income declared by the assessee and the amount shown in the TDS certificates. The assessee claimed the difference represented reimbursement of expenses incurred on behalf of clients, debited to an 'Expenses recoverable account.' The Assessing officer rejected this explanation, assessing the difference as income. The CIT(A) upheld the re-opening's validity but deleted the additions, accepting the assessee's explanation. The Tribunal held that the re-opening was valid based on the reasons recorded by the Assessing officer, even if no income was ultimately assessed. The difference in income led to a belief of income escapement, justifying the re-opening. The Tribunal upheld the CIT(A)'s decision for both years.Issue 2: Addition of difference in operating incomeThe Tribunal noted a lack of examination by the Assessing officer during the original assessment regarding the accounting practice of the assessee. The CIT(A) deleted the additions based on sample bills and reconciliation statements provided by the assessee. The Assessing officer expressed concerns about possible income leakage and expense inflation without substantial evidence from the assessee. The Tribunal acknowledged that mere reimbursement of expenses does not generate assessable income. However, it found the AO did not properly verify the claim or appreciate the business practices of custom clearing agents. The Tribunal set aside the CIT(A)'s decision, directing the AO to re-examine the issue considering the trade practices and accounting methods of the assessee.In conclusion, the Tribunal allowed the revenue's appeals for statistical purposes and dismissed the assessee's appeals, emphasizing the need for a fresh examination by the AO regarding the addition of the difference in operating income.