1996 (10) TMI 121 - AT - Income Tax

Tribunal rules in favor of assessee, cancelling additions and reassessment proceedings

The Tribunal allowed the assessee's appeals for the assessment years 1986-87 and 1987-88, directing the deletion of additions made by the AO and ... - Issues Involved:1. Addition of Rs. 12 lakhs as unexplained income in the form of share application and allotment money.2. Disallowance of bardana purchase expenses amounting to Rs. 4,87,109.3. Entitlement to relief under Sections 80-I and 80HH on the assessed income.4. Validity of reopening assessment under Section 148 for the assessment year 1986-87.5. Levy of interest under Section 217.Issue-wise Detailed Analysis:1. Addition of Rs. 12 lakhs as unexplained income:The assessee filed a return showing an income of Rs. 32,67,890 for the assessment year 1987-88, which included funds introduced as 'equity shareholders money' from a public issue of shares. The AO noted several irregularities in the share applications, such as applications written in similar handwriting, illegible signatures, and many shareholders being illiterate or employees of a sister concern. The AO sent inquiry letters to shareholders, many of which were returned undelivered or indicated that the shareholders were non-existent. The AO concluded that the sum of Rs. 12 lakhs represented unaccounted money of the assessee and added it to the total income.On appeal, the CIT(A) confirmed the AO's action but directed the AO to verify the assessee's claim that Rs. 6 lakhs pertained to the assessment year 1986-87. The assessee argued that the share capital issue was genuine, and the AO's addition was based on presumption. The assessee provided detailed explanations and evidence, including compliance with legal formalities, confirmation letters from shareholders, and the capacity of shareholders to invest. The Tribunal found that the public issue was genuine, the shareholders were identified, and the transactions were genuine. The addition of Rs. 12 lakhs was directed to be deleted.2. Disallowance of bardana purchase expenses:The assessee claimed bardana purchase expenses of Rs. 4,87,109 from two co-operative societies. The AO disallowed the expenses, doubting the genuineness of the transactions based on discrepancies in payment details and the identical language of confirmation letters from the societies. On appeal, the CIT(A) confirmed the disallowance.The assessee argued that the payments were made through cheques to Sinnar Bidi Udyog Ltd. on behalf of the societies as per their instructions. The ITO, Karimnagar, confirmed the genuineness of the transactions after making inquiries from the societies' presidents. The Tribunal found that the purchases were genuine and directed the AO to delete the disallowance.3. Entitlement to relief under Sections 80-I and 80HH:The assessee claimed that the entire income was from manufacturing activities eligible for deductions under Sections 80-I and 80HH. The CIT(A) directed the AO to verify the claim and allow appropriate relief. Since the Tribunal deleted the additions made, the question of allowing further deductions did not arise, and the ground was rejected as infructuous.4. Validity of reopening assessment under Section 148 for the assessment year 1986-87:The AO reopened the assessment for the assessment year 1986-87 based on the CIT(A)'s observation that Rs. 6 lakhs of the share application money pertained to that year. The assessee challenged the reopening, arguing that the notice under Section 148 was invalid due to non-recording of reasons and being issued beyond the statutory period of four years without any failure on the part of the assessee to disclose material facts.The Tribunal found that the AO failed to record reasons for reopening the assessment, making the notice under Section 148 invalid. Additionally, the notice was issued beyond the statutory period of four years, and there was no failure on the assessee's part to disclose material facts. The reassessment was directed to be cancelled.5. Levy of interest under Section 217:Since the reassessment was cancelled, the ground regarding the levy of interest under Section 217 was rejected as infructuous.Conclusion:The Tribunal allowed the appeals of the assessee for both assessment years 1986-87 and 1987-88, deleting the additions made and cancelling the reassessment proceedings.