Assessee wins appeal as tax officer made additions on different grounds than those used for reopening assessment

ITAT Mumbai allowed the assessee's appeal against addition on outstanding sundry creditors. The assessment was reopened based on information that the assessee failed to repay loans and ceased liability, resulting in income escaping assessment of Rs. 86 crores. However, the AO made additions only on sundry creditors without addressing the specific grounds for reopening. Following HC precedent in Jet Airways case, the AO must assess income for which reopening was made. Since the AO failed to make additions on the actual reopening grounds while making additions on other matters, the assessment was held invalid.

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Issues Involved:
1. Addition on outstanding sundry creditors.
2. Violation of the principle of natural justice.
3. Reopening of assessment proceedings.

Summary:

1. Addition on Outstanding Sundry Creditors:
The assessee, a partnership firm engaged in manufacturing and exporting gold jewelry and diamonds, challenged the addition of Rs. 107,53,11,047/- on outstanding sundry creditors made by the Assessing Officer (A.O.) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The A.O. determined a gross loss of Rs. 12,66,71,272/- and made an addition of Rs. 51,26,21,438/- during the initial assessment. Upon reopening the case under section 147 of the Income Tax Act, 1961, the A.O. added Rs. 107,53,11,047/- on account of unexplained sundry creditors, which the CIT(A) upheld, stating the assessee failed to substantiate its claim with cogent evidence.

2. Violation of Principle of Natural Justice:
The assessee contended that they were not given sufficient opportunity of hearing by the CIT(A), thereby violating the principle of natural justice. The Tribunal noted that the A.O. had rejected the assessee's objections to the reopening notice and passed the assessment order under section 144 read with section 147 of the Act without providing adequate opportunity for rebuttal.

3. Reopening of Assessment Proceedings:
The assessee also challenged the reopening proceedings under section 148(1) of the Act as time-barred and argued that the A.O. did not make additions related to the reasons recorded for reopening. The Tribunal observed that the A.O. reopened the assessment based on information from the Investigation Wing, alleging cessation of liability due to non-repayment of loans from Antwerp Diamond Bank (ADB) and other banks. However, the A.O. made an addition on outstanding sundry creditors instead of the bank loan, which was the basis for reopening.

The Tribunal relied on the decision in CIT vs. Jet Airways (I) Limited, which mandates that the A.O. must assess the income for which the reopening was initiated. Since the A.O. did not make an addition on the grounds for reopening but only on the outstanding sundry creditors, the Tribunal held the assessment order to be null and void.

Conclusion:
The Tribunal declared the assessment order invalid and allowed the appeal filed by the assessee, rendering other grounds of appeal academic in nature. The order was pronounced in the open court on 22.09.2023.

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