Reassessment Order Quashed for AY 2006-07, Tribunal Decision on Professional Fees, Leave Encashment

The reassessment order for AY 2006-07 was quashed as the AO failed to follow prescribed procedures, leading to the inclusion of already declared income. For AY 2007-08, the tribunal partially allowed the appeal, remanding the issue of professional fees for verification and excluding the provision for leave encashment from book profit calculations under section 115JB.

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Issues Involved:
1. Reopening of assessment under section 147.
2. Addition of Rs. 1,16,50,971 as deemed income under sections 69B/69C.
3. Disallowance of Rs. 9,00,000 for professional fees.
4. Disallowance of Rs. 7,65,120 towards rent under section 40A(2)(b).
5. Addition of Rs. 7,83,672 for professional fees in AY 2007-08.
6. Addition of Rs. 38,33,170 towards provision for leave encashment under section 115JB.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 147:
The assessee challenged the reopening of assessment by the DCIT under section 147, arguing that the procedure laid down by the Supreme Court in GKN Driveshafts (India) Pvt Ltd vs. ITO was not followed. The reassessment was initiated based on a survey where an undisclosed income of Rs. 50,00,000 was admitted by the Managing Director. However, the assessee contended that this income was already included in the original return. The tribunal found that the Assessing Officer (AO) did not dispose of the objections raised by the assessee before framing the assessment order, violating the principles laid down by the Bombay High Court in CIT vs. Jet Airways and the Supreme Court in GKN Driveshafts. Consequently, the reassessment order was quashed as the AO was bound to drop the proceedings once it was established that the alleged escaped income was already included in the return.

2. Addition of Rs. 1,16,50,971 as Deemed Income under Sections 69B/69C:
Since the reassessment order was quashed on jurisdictional grounds, the tribunal did not delve into the merits of the addition of Rs. 1,16,50,971 as deemed income under sections 69B/69C.

3. Disallowance of Rs. 9,00,000 for Professional Fees:
Similarly, the tribunal did not address the disallowance of Rs. 9,00,000 for professional fees due to the quashing of the reassessment order.

4. Disallowance of Rs. 7,65,120 towards Rent under Section 40A(2)(b):
This issue was also not examined on merits due to the quashing of the reassessment order.

5. Addition of Rs. 7,83,672 for Professional Fees in AY 2007-08:
The assessee contested the disallowance of Rs. 7,83,672 paid for professional consultancy, arguing that the entire amount was not related to the issuance of shares. The tribunal found merit in the assessee's argument and remanded the issue back to the AO for verification. The AO was directed to allow the consultancy fees related to routine legal matters and other non-share issuance activities as revenue expenses.

6. Addition of Rs. 38,33,170 towards Provision for Leave Encashment under Section 115JB:
The AO added the provision for leave encashment while computing book profit under section 115JB, considering it an unascertained liability. The assessee argued that the provision was based on actuarial valuation as per Accounting Standard-15 and should not be added back. The tribunal agreed with the assessee, citing the Supreme Court's decision in Bharat Earth Movers and the Tribunal's ruling in ACIT vs. Piramal Holdings Ltd. It held that the provision for leave encashment, if calculated on a scientific basis, is an ascertained liability and should not be added while computing book profits under section 115JB. The AO was directed to exclude this amount while recomputing the income.

Conclusion:
The appeal for AY 2006-07 was allowed, resulting in the quashing of the reassessment order. For AY 2007-08, the appeal was partly allowed, with the issue of professional fees remanded for verification and the addition for leave encashment provision deleted.

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