2018 (3) TMI 1596 - AT - Income Tax

Reopening of assessment - addition u/s 68 in respect of share application money received by the assessee company - Held that - In the instant case where the return filed by the assessee was not subjected to scrutiny assessment and the entries are available in the case of the assessee from the companies which were named by Shri Praveen Jain to providing accommodation entries and the amounts recorded in the assessee s financial statements are also the same as disclosed by Shri Praveen Jain, the belief formed by the AO after due examination of the material on record that the income of the assessee chargeable to tax during the relevant assessment year has escaped assessment cannot be said to be arbitrary or irrational and it cannot be said that there exists no rational and intelligible nexus between the reasons and the belief. Reasons recorded or the material available on record must have nexus to the subjective opinion formed by the AO regarding the escapement of the income but then, while recording the reasons for belief formed, the AO is not required to finally ascertain the factum of escapement of the tax and it is sufficient that the AO had cause or justification to know or suppose that income had escaped assessment. There is no illegality in action of the AO in assuming jurisdiction under section 147 in the instant case. In the result, ground no. 1 of the assessee s appeal is hereby dismissed. Addition u/s 68 - There is no action taken by the AO in terms of calling information from these companies under section 133(6) and/or issuing summons to directors of these companies under section 131 of the Act. Further, where the AO relies upon the statement of third parties (Praveen Jain and others) recorded u/s 132(4), without getting into controversy whether the said statement was retracted subsequently, the fact remains that the assessee deserves an opportunity to cross examine such persons as held in case of Andaman Timber Industries (2015 (10) TMI 442 - SUPREME COURT). During the course of assessment proceedings, the assessee company has made specific request to the AO to allow cross examination of these persons which has however not being provided to the assessee company. No basis for making addition under section 68 - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the reassessment proceedings under section 147 of the Income Tax Act, 1961.
2. Addition of share application money under section 68 of the Income Tax Act, 1961.

Issue 1: Validity of the reassessment proceedings under section 147 of the Income Tax Act, 1961

The assessee challenged the reassessment proceedings initiated under section 147 of the Income Tax Act, 1961, arguing that the Assessing Officer (AO) did not independently apply his mind and acted solely based on the report from the DDIT (Inv.), Mumbai. The assessee contended that the AO did not conduct any preliminary inquiry to form a belief that income had escaped assessment. The statement recorded under section 132(4) by Shri Praveen Kumar Jain and others did not mention the assessee or the transactions related to the assessee. The assessee also argued that the retraction affidavit filed by Shri Praveen Kumar Jain was not considered by the CIT(A). The assessee relied on the decision of the Hon’ble Delhi High Court in Signature Hotels (P) Ltd. vs. ITO, which emphasized the need for specific information for initiating action under section 148.

The Tribunal, however, upheld the validity of the reassessment proceedings. It noted that the AO had reasons to believe that income had escaped assessment based on the information received from the Investigation Wing, Mumbai, which indicated that the assessee had taken accommodation entries in the form of share application money from companies not engaged in genuine business activities. The Tribunal held that there was a rational nexus between the material on record and the belief formed by the AO. The sufficiency and adequacy of the reasons for the belief were not open to scrutiny for determining the assumption of jurisdiction under section 147. The Tribunal distinguished the case from Signature Hotels (P) Ltd., noting that in the present case, specific details of the companies and transactions were available with the AO.

Issue 2: Addition of share application money under section 68 of the Income Tax Act, 1961

The assessee contested the addition of ?35,00,000/- and ?30,00,000/- under section 68 on account of share application money. The assessee provided detailed documentation to establish the identity, creditworthiness, and genuineness of the transactions, including share application forms, board resolutions, PAN cards, bank statements, audited accounts, and certificates of incorporation.

The Tribunal found that while the AO had a prima facie reason to believe that the income had escaped assessment, he failed to conduct further investigation or verification of the documents submitted by the assessee during the assessment proceedings. The AO did not issue summons under section 131 or call for information under section 133(6) from the investor companies. The Tribunal emphasized that the AO could not merely reject the explanation provided by the assessee without thorough verification or inquiry. The Tribunal also noted that the assessee was not provided an opportunity to cross-examine the persons whose statements were relied upon by the AO, which violated the principles of natural justice as held by the Hon’ble Supreme Court in Andaman Timber Industries.

The Tribunal concluded that in the absence of any falsity found in the documents submitted by the assessee, the AO was not justified in making the addition under section 68. The Tribunal allowed the assessee’s appeal on this ground.

Conclusion:

The Tribunal upheld the validity of the reassessment proceedings under section 147 but deleted the addition made under section 68 on account of share application money, allowing the assessee’s appeal partly.