2015 (10) TMI 23 - HC - Income Tax

Validity of reopening of assessment - assessment was re-opened based on information received by the AO from the Investigation Wing that the Assessee had obtained accommodation entries from certain entry operators during the relevant period - Held that - Once the tangible material available with the AO provides a live link with him forming a belief that income of an Assessee had escaped assessment he would subject to other statutory requirements be entitled to reopen a concluded assessment. The question whether the AO has reason to believe that income has escaped assessment and is liable to be reopened under Section 147 of the Act has also to be viewed from the standpoint of the AO. Thus indisputably in certain circumstances such information as was received by the AO in this case may have provided the AO with a reason to believe that income of the Assessee had escaped assessment. In our view the Tribunal erred in observing that the AO had reopened the assessment on the same material as was available during the initial assessment proceedings. In the present case it is difficult to accept that reasonable conclusion could be drawn that the Assessee had failed to disclose truly and fully all material facts necessary for its assessment. In the facts of this case where the AO had already in the initial round examined and verified the entries in question it would only be reasonable for the AO to examine the information received and to at least verify the same with the records of the concluded assessment proceedings. A plain examination of the same would have revealed that the Assessee had not claimed to have received any funds from Richie Rich as share capital. Further the Assessee had also provided confirmation of the loans received as well as other details during the said proceedings. It would also be relevant to note that the loans availed had been returned through banking channels during the period and this was also confirmed independently to the AO. In the given circumstances the least that was required for the AO was to independently apply his mind to ascertain that the information provided was credible and sufficient for drawing a reasonable inference that the income of the Assessee had escaped assessment on account of failure on the part of the Assessee to disclose truly and fully all material facts. Clearly the examination of facts required at the threshold to form such a belief would be more detailed if the said transaction in question had already been subjected to scrutiny during the initial assessment. It does not appear that the AO applied its mind to the material available including the records of the earlier assessment proceedings. This is also apparent from the fact that during the assessment proceedings the AO did not confront the Assessee with any new material or examine any other evidence other than what was already available in the initial assessment period. In view of the above we find no infirmity with the conclusion of the CIT(A) and the Tribunal that AO could not have assumed jurisdiction to reopen the assessment under Section 147/148 of the Act. Assessee produced ample evidence to indicate that the entries in question were genuine. During the initial assessment the Assessee had filed a copy of the agreement between the Assessee and Mahan Enterprises Ltd. which indicated that certain activities of the Assessee were to be funded by Mahan Enterprises Ltd. Mahan Enterprises Ltd. had also directly filed a letter with the AO explaining an arrangement and had also confirmed that it had arranged funds for the Assessee and further that the Assessee had also refunded sums to the extent of Rs. 1.07 crores. Indisputably this included the amount obtained by the Assessee from Richie Rich. The Assessee also produced a copy of the Account of Richie Rich in its books bank statements showing the transactions with Richie Rich as well as confirmation from Richie Rich. The Assessee had also pointed out that the transaction in question had been examined during the regular assessment proceedings. The AO simply rejected the contention as non-tenable. The confirmation produced by the Assessee was faulted as not being of a current date. We are unable to find any justification for these views and therefore the assessment order cannot be sustained. The funds availed by the Assessee from Richie Rich had been returned several years ago and there was no justification for the AO to insist on a fresh confirmation. The Assessee had also produced the balance sheet and bank account of Richie Rich reflecting the entries. On examination of the evidence the CIT(A) rightly came to the conclusion that no addition under Section 68 of the Act in respect of the transaction was sustainable. The Tribunal also noted the evidence and material produced by the Assessee which remained uncontroverted and upheld the order passed by the CIT(A) - Decided in favour of the Assessee

Summary

The central legal questions considered by the Court were twofold: (a) whether the reopening of the assessment under Section 147/148 of the Income Tax Act, 1961 (the 'Act') was justified and in accordance with law, and (b) whether the addition made to the Assessee's income under Section 68 of the Act on account of unexplained cash credits was sustainable on merits.

Regarding the first issue, the Court examined the scope and limits of the Assessing Officer's (AO's) jurisdiction to reopen a completed assessment, particularly when the reopening occurs beyond four years from the end of the relevant assessment year. The legal framework centered on Section 147 of the Act, which permits reopening if the AO has a "reason to believe" that income chargeable to tax has escaped assessment. The proviso to Section 147 restricts reopening after four years unless the income escaped assessment due to failure on the part of the Assessee to disclose fully and truly all material facts necessary for assessment.

The Court analyzed precedents including the Supreme Court's decisions in CIT v. Kelvinator of India Ltd. and Phool Chand Bajrang Lal v. Income-Tax Officer, which clarify that the AO's "reason to believe" must be based on tangible and credible material, not mere suspicion or a change of opinion. The AO cannot reopen an assessment simply because he disagrees with the initial conclusion; there must be fresh material not previously available or considered. The Court emphasized that reopening based on the same material already examined during the original assessment would amount to impermissible review rather than reassessment.

In the present case, the AO reopened the assessment based on information received from the Investigation Wing alleging that the Assessee had obtained accommodation entries from certain entry operators, including Richie Rich Overseas Pvt. Ltd. The Court held that such information constituted fresh material distinct from that available during the initial assessment. The Investigation Wing's report detailed the involvement of known entry operators and identified specific transactions with the Assessee, thus providing a "live link" for the AO to form a reasonable belief that income had escaped assessment.

However, the reopening took place after four years from the end of the assessment year, triggering the proviso to Section 147. The Court examined whether the Assessee had failed to disclose fully and truly all material facts necessary for assessment. It was undisputed that during the initial assessment, the AO had scrutinized and verified the transactions with Richie Rich, and the Assessee had provided confirmations, ledger accounts, bank statements, and other documentary evidence supporting the genuineness of the loans. The Court referenced the Supreme Court's rulings in Calcutta Discount Company and Burlop Dealers Ltd., which establish that disclosure of primary facts suffices and the Assessee is not obliged to anticipate and disclose all possible inferences the AO might draw.

The Court found that the AO did not apply independent mind to the fresh material in light of the earlier assessment records, nor did he confront the Assessee with any new evidence during reassessment. The AO also failed to dispose of the Assessee's objections against reopening, violating procedural safeguards mandated by the Supreme Court in G.K.N Driveshafts (India) Ltd. The Court held that these safeguards-recording reasons to believe, communicating reasons to the Assessee, allowing objections, and passing a speaking order disposing of objections-are integral to ensuring reopening is based on lawful reasons and not arbitrary whims.

Consequently, the Court concluded that the reopening was not sustainable as the proviso to Section 147 was not satisfied; the Assessee had not failed to disclose fully and truly all material facts, and the AO's reasons for reopening lacked the required application of mind and credible material beyond what was already considered.

On the second issue concerning the addition under Section 68 of the Act for unexplained cash credits, the Court noted that the AO did not produce any credible or fresh material to establish that the loans from Richie Rich were bogus or accommodation entries. The Assessee had furnished ample evidence including agreements, confirmations, bank statements, and tax returns of Richie Rich to demonstrate the genuineness of the transactions. The AO's rejection of this evidence on grounds such as the confirmation not being of current date was found unjustified.

The Court reiterated that an addition under Section 68 cannot be sustained merely on a change of opinion by the AO without fresh, credible material. The Tribunal and CIT(A) had rightly held that the addition was unwarranted and the AO's action was not tenable. The Court upheld these findings, emphasizing that the Assessee had satisfactorily explained the entries and the loans had been repaid through banking channels, further supporting their genuineness.

In sum, the Court held:

• The reopening of assessment under Section 147/148 was not in accordance with law as the AO's reasons were neither based on fresh credible material nor supported by the necessary application of mind, and the proviso to Section 147 was not satisfied.
• The addition under Section 68 of the Act was not sustainable on merits as the Assessee had furnished sufficient evidence to prove the genuineness of the loans, and the AO failed to produce any credible contrary material.

The Court dismissed the appeal filed by the Revenue, affirming the orders of the CIT(A) and the Tribunal.