Invalid Reopening on Old Loan Balances: ITAT quashes Reopening Based on Balance Sheet Suspicion and Pre-Commencement Loans [Read Order]

The Jaipur bench of the Income Tax Appellate Tribunal quashed the reopening based on suspicions raised by the balance sheet and old loans. The Tribunal noted that the assessee had not commenced business during the year and that the loans were received through banking channels from identifiable individuals.

It was observed that the Assessing Officer failed to bring any tangible material indicating income escapement. Consequently, the ITAT deleted the ₹46.79 lakh addition made under Section 68 and allowed the assessee’s appeal in full.

The facts as coming out of the records are that the assessee is in the course of setting up of the business and purchased an Industrial Land where no commercial activity has yet been started. During the course of assessment proceedings for AY 2016-17, the assessee furnished the Financial Statements for the year under consideration, where the issue involved was the source of the capital introduced by the partners. Based on the Balance Sheet so submitted, the AO found that unsecured loans of Rs. 1,40,89,951/- and partners' capital account are outstanding as.

Further, on this basis, the AO initiated the proceedings and thereafter made an addition of the entire amount of unsecured loans even though the assessee furnished confirmations of the

parties and also the relevant documents, copies of the books of accounts, etc., to show that most of the unsecured loans were received in the earlier years.

The CTT(A), considering these facts, deleted the addition to the extent of Rs. 92,10,830/- of the unsecured loans which were received in the preceding years. Out of the balance amount of addition of Rs 48,79,121/-, he allowed relief of Rs. 2,00,000/-in respect of one loan of Mr Ravi

Agrawal HUF and sustained addition of Rs 46,79,121/- in respect of 5 loans of the persons whose Income for the year under consideration was lower than the loan given.

The Assessee submitted that most of the unsecured loans were outstanding from the previous year. Still without properly verifying the facts, the AO just proceeded to make an addition of the entire amount of Rs. 1,40,89,951/-unsecured loans outstanding as on the balance sheet date. The assessee further submitted that the parties in respect of which addition is sustained are filing their returns of income, except Pista Devi, who is the mother of the partners of the assessee.

The entire money has been received through account payee cheques. The assessee contended that the firm has not commenced any business activity and therefore, it is not justified to say that the assessee has camouflaged earned this income in view of the Delhi High Court Judgement in

the case of Alankar Promoters LLP Vs. ITΟ

The assessee further argued that the revenue activity had not started, loans were received through account payee cheques and the parties were relatives of partners and confirmed the loans. Thus, the addition made by applying the provisions of section 68 is not justified. Further, the assessee also contended that the entire reassessment was initiated on the basis of details

received during the course of assessment proceedings of AY 2016-17 in respect of capital contribution by partners and unsecured loan received by the assessee during AY 2012-13.

The Tribunal relied on the judgment of ITAT Jaipur Bench in the case of Sushila Choudhary vs. ITO in support of the non-application of mind. In the judgment relied upon by the assessee, ITAT Jaipur Bench also supported its view by relying upon the judgment passed by Hon'ble High Court of Bombay in the case of TATA & Sons Ltd vs DCIT, wherein it was held in para 6 & 7 as under:-

‘’7. in our view, if the reasons for reopening the assessment is based on incorrect facts or conclusion, certainly the notice issued for reopening cannot be sustained. Moreover, if according to respondent No 1 only the sale of shares of TCS Ltd was ‘business income’ and not ‘profits arising of sale of investment’ to say that the amount of Rs 22,71,25,79,374- has escaped assessment, also indicates non application of mind.’’

The two-membered bench of Rathod Kamlesh Jayantbhai (Accountant Member) and Dr S. Seethalakshmi (Judicial Member) observed that the assessee had not started the business activity; therefore, in view of the Delhi High Court decision in the case of Alankar Promoters LLP VS. ITO, reassessment proceedings under section 68 cannot be justified in the case of the assessee firm. And the Tribunal held that the re-assessment proceedings are not justified in this case, and the appeal of the assessee was allowed.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates