Reasons on which reopening done must first survive to make addition on additional issues also – ITAT explains Explanation 3 to section 147
ABCAUS Case Law Citation:
ABCAUS 3804 (2023) (09) ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) and raised the legal ground regarding reopening of the assessment and also the ground against the estimation of the income of the assessee.
The case of the assessee was reopened by issue of notice u/s 148 of the Income Tax Act, 1961 (the Act) on the ground that there was a difference between purchases as recorded in the audited accounts and as the payment made to supplier.
However, during the re-assessment proceedings u/s 147 the assessee successfully reconciled the difference in the purchase figure. This resulted into no addition being made by the AO on purchases which happened to be the ground of opening.
However, the AO went on to hold that there was ambiguity regarding correctness of the sale figure on the ground that the true value of the gross profit shown by the assessee was not verifiable.
As a result, the AO passed the impugned order by rejecting the books of accounts of the assessee and estimated the income of the assessee at percentage of sales.
Before the Tribunal the assessee contended that as the reasons on which the reopening has been done itself no more survives in view of the fact that the purchases have been fully reconciled and accepted by the AO and no addition on such account has been made by the AO, the reopening and the consequential assessment itself is required to be quashed.
In regard to the estimation of income, it was submitted that no comparable cases have been shown and in the absence of any comparable case, the income of the assessee could not be estimated at the whims and fancies of the AO. It was also submitted that when the gross profit of the assessee was accepted by the AO, he could not have estimated the income of the assessee at a percentage higher than the gross profit.
The ITAT opined that the contention of the Revenue that Explanation 3 to Section 147 of the Act protects the assessment even though no addition has been made, does not stand to reason insofar as the wordings used in the said section is that, “the AO may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148.”
The Tribunal observed that the reasons on which the reopening as done must first survive and only when such reason survive then in the course of such assessment, the AO finds other issues which have come to his notice, liberty is granted to the AO to make addition on this additional issues also. When the primary issue fails, the reopening fails along with that.
The Tribunal opined that in the present case the reopening has been done because there was allegation of understatement in respect of the purchases. When no addition has been made on that count and that issue has already been reconciled by the assessee and accepted by the AO, the reopening itself failed. Consequential assessment will also fail.
On the merits, the Tribunal noticed that in the assessment order the AO having rejected the books of accounts had not given any comparable case for the purpose of estimating the income of the assessee. Admittedly, the above method for estimation would be the assessee’s own declaration for the earlier and subsequent assessments even which had not been attempted by the AO.
The ITAT held that a verifiable and authenticable comparable case, the assessment as has been done by the AO remained unsubstantiated and even on this ground also the addition as made by the AO on merits was deleted.
Accordingly, the appeal of the assessee was allowed.
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