2025 (8) TMI 52 - AT - Income Tax

Reopening under Section 147 invalid without material; additions under Section 68 and salary disallowance set aside

M/s Lookline Vincom Pvt. Ltd. Versus Income Tax Officer-6 (2), Ward 6 (2), Kolkata

ITAT Kolkata held that reopening assessment u/s 147 was invalid due to lack of material indicating escapement of income. Addition u/s 68 of Rs.17 lakhs ... Reopening of assessment u/s 147 - Addition u/s 68 - amount received from the shell company - HELD THAT:- As in the annexure attached to notice u/s 148A(b) of the Act there has been no whisper about the escapement of income. Thereafter AO passed the order u/s 148A(d) of the Act dated 06.04.2022, wherein it has been stated that the assessee was given show cause notice and the same was replied. Thereafter in the third last para of the order, AO simply noted that the amount received from the shell company is liable to be treated as income u/s 68 - AO thereafter noted that the assessee has received ₹17 lacs from M/s Eclcat Constructions Pvt. Ltd. in his bank account and failed to include the same in their return of income. Simply discussing the modus operandi of the shell companies, the AO noted that ₹17 lacs is required to be added in the income of the assessee and it is a fit case for issuance of notice. Thus, we find that there is infirmity in the procedure followed by AO in reopening the case and accordingly, the legal issue raised by the assessee is dismissed. Addition on account of sale of investments - The assessee has discharged the burden by furnishing all the evidences before the ld. AO as well as before the CIT (A) but both the authorities below have not commented on the evidences filed by the assessee. In these circumstances, we are not in a position to sustain the addition. CIT (A) has not given any finding as to how the assessee has introduced his own money into its books of accounts and simply acted on presumption and surmises. Accordingly, we set aside the order of ld. CIT (A) and direct the AO to delete the addition. Disallowance of salaries - AO noted that the assessee has paid salaries to 34 employees which in his opinion is excessive and unreasonable keeping in view the profile of the company - HELD THAT:- we find that the assessee has employed these employees on regular basis and these employees were being paid salaries constantly from the earlier assessment years. Both the authorities below have not point out any defect in the payments made by these employees and simply acted on the presumption that the salary is excessive and unreasonable. It is the domain of the assessee how to run the business and how many employees are to be employed in the company and the tax authorities have no role to play in the running of the business of the assessee. The ld. AO cannot be allowed to step into the shoe of the businessman. See S.A Builders [2006 (12) TMI 82 - SUPREME COURT] ISSUES: Validity and legality of reopening assessment by issuing notice under Section 148 of the Income-tax Act, 1961.Whether addition of Rs.17 lacs on account of alleged unexplained cash credit under Section 68 of the Act is justified.Whether the addition of Rs.73,53,000/- by disallowance of salaries paid to employees is sustainable. RULINGS / HOLDINGS: Reopening of assessment under Section 148 was held valid as the Assessing Officer followed the procedure laid down in the Income-tax Act, including issuance of notice under Section 148A(b) with prior approval of the competent authority, and gave opportunity of being heard; thus, the reopening was not illegal or bad in law.The addition of Rs.17 lacs as unexplained cash credit under Section 68 was not sustained because the assessee discharged the burden of proof by furnishing evidences including sale bill, bank statements, share certificates, audited accounts, and valuation report; neither the Assessing Officer nor the appellate authority commented on or disputed these evidences, and the addition was based on mere presumption and surmises.The disallowance of salaries amounting to Rs.73,53,000/- was set aside as the assessee employed employees on a regular basis and paid salaries consistently in earlier years; the tax authorities lacked any basis to interfere with the business decision on number of employees or salary payments, and no defect in payments was pointed out; the addition was held unjustified. RATIONALE: The Court applied the procedural safeguards under Sections 148, 148A(b), and 148A(d) of the Income-tax Act, 1961, emphasizing the necessity of prior approval and opportunity to the assessee before reopening assessment; the Court found no infirmity in the procedural compliance by the Assessing Officer.The legal framework under Section 68 requires the assessee to prove the identity, creditworthiness, and genuineness of the parties and transactions relating to unexplained cash credits; the Court noted that the assessee provided comprehensive documentary evidence satisfying this burden, and the authorities below failed to critically examine or rebut such evidence.The Court relied on established principles that tax authorities cannot substitute their judgment for legitimate business decisions regarding employment and salary payments; reference was made to the Apex Court decision in S.A Builders v. CIT (Appeals), affirming that the quantum and reasonableness of salary payments are within the business domain and not for tax authorities to question absent irregularity.