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 ₹ 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

Issues Involved:
1. Legality of reopening assessment under Section 147 of the Income Tax Act, 1961.
2. Justification of additions made under Section 68 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Legality of Reopening Assessment under Section 147 of the Income Tax Act:

The appeal under Section 260A of the Income Tax Act, 1961, was filed by the Revenue against the order of the Income Tax Appellate Tribunal (ITAT) which upheld the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] in favor of the Assessee. The primary controversy was whether the Assessing Officer (AO) was justified in reopening the assessment based on information received from the Investigation Wing that the Assessee had obtained accommodation entries from certain entry operators during the financial year 2000-01.

The Tribunal held that the Assessee had disclosed all relevant material during the original assessment, and thus, the pre-condition under the proviso to Section 147 was not met. The Tribunal also noted that the reopening of assessment was based on the same material disclosed by the Assessee during the initial assessment, which amounted to a mere change of opinion, not permissible under the law.

The court emphasized that the AO must have "reason to believe" based on tangible and credible material, not on mere suspicion or change of opinion. The material should not be the same as considered during the initial assessment. The court cited the Supreme Court's decision in CIT v. Kelvinator of India Ltd. which emphasized that "reason to believe" must be based on tangible material and not a change of opinion.

In this case, the material on which the AO based his opinion was a report from the Investigation Wing, considered fresh material. However, the court found that the AO did not apply his mind to the material available, including the records of the earlier assessment proceedings. The court also noted that the AO did not confront the Assessee with any new material or examine any other evidence other than what was already available during the initial assessment period.

The court concluded that the AO could not have assumed jurisdiction to reopen the assessment under Section 147/148 of the Act as the conditions specified in the proviso to Section 147 were not met. The Assessee had disclosed all material facts necessary for the assessment during the initial proceedings, and there was no failure on the part of the Assessee to disclose fully and truly all material facts.

2. Justification of Additions Made under Section 68 of the Income Tax Act:

The second issue was whether any addition could have been made to the taxable income of the Assessee as unexplained credit under Section 68 of the Act. The AO made an addition of Rs. 55,15,400/- on account of unexplained cash credit in the name of Richie Rich. However, the Assessee produced ample evidence to indicate that the entries in question were genuine, including a copy of the agreement with Mahan Enterprises Ltd., confirmation from Richie Rich, and bank statements showing the transactions.

The CIT(A) and the Tribunal found that the AO did not produce any material or confront the Assessee with any credible evidence that could lead to the inference that the entries were bogus or accommodation entries. The Tribunal noted that the Assessee had disclosed all relevant material during the initial assessment, and the AO's addition was based on a mere change of opinion, which was not permissible.

The court upheld the Tribunal's decision that no addition under Section 68 of the Act was sustainable as the Assessee had provided sufficient evidence to support the genuineness of the transactions. The AO's insistence on fresh confirmation was unjustified as the funds had been returned several years ago, and the Assessee had already produced the balance sheet and bank account of Richie Rich reflecting the entries.

Conclusion:

The court dismissed the appeal, finding no infirmity with the conclusion of the CIT(A) and the Tribunal that the AO could not have assumed jurisdiction to reopen the assessment under Section 147/148 of the Act. The court also concluded that no addition under Section 68 of the Act was sustainable as the Assessee had provided sufficient evidence to support the genuineness of the transactions.

The appeal was dismissed, and the parties were left to bear their own costs.

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