2018 (5) TMI 1905 - AT - Income Tax

Reopening of assessment u/s 147 - material to form any reason to believe any escapement of income - information received from the Investigation Wing - Challenge of the assessee is that since in the reasons recorded, the AO has not spelt out as to what he did with the information received by him from the Investigation Wing, the reasons are hit by the vice of non-application of mind to the information so received - HELD THAT - In a situation like the present one, as is trite, where there is a cleavage of opinion between different High Courts on an issue and none of the decisions has been rendered by the jurisdictional High Court, the view in favour of the assessee needs to be followed. Hence, in deferential keeping with Meenakshi Overseas 2017 (5) TMI 1428 - DELHI HIGH COURT the reasons recorded by the AO to form belief of escapement of income are found to be no reasons in the eye of the law. They are held to be null and void and are cancelled. Accordingly, the reassessment proceedings, culminating in the impugned order, are also cancelled. Nothing further survives for adjudication. In the result, the appeal is allowed.

Summary

Issues Involved:
1. Validity of the initiation of reassessment proceedings under Section 147/148 of the Income Tax Act, 1961.
2. Legitimacy of the reassessment proceedings being initiated for a "collateral purpose".
3. Justification of the addition of ?2,21,895/- to the assessee's income.
4. Justification of the addition of ?3,500/- towards alleged commission.

Issue-wise Detailed Analysis:

1. Validity of the Initiation of Reassessment Proceedings:
The primary contention of the assessee was that the Assessing Officer (AO) had no material to form a reason to believe that income had escaped assessment, and that the reassessment proceedings were initiated merely for making fishing and roving enquiries. The AO recorded reasons based on information received from the Investigation Wing regarding bogus entries of Long Term/Short Term Capital Gain and bogus gifts, specifically involving M/s. Ayushi Stock Brokers (P) Ltd. The assessee was identified as a beneficiary of these bogus entries, with an amount of ?2,21,895/- credited to their bank account. The AO concluded that this transaction was bogus and represented income from undisclosed sources, which had escaped assessment.

The assessee argued that the reassessment proceedings were invalid as the reasons recorded were based on borrowed satisfaction without any independent application of mind by the AO. Reliance was placed on the case of 'Principal CIT vs. Meenakshi Overseas (P) Ltd.', which held that reasons must be self-evident and demonstrate a link between the information and the formation of belief of income escapement.

The Tribunal found that the AO merely stated the information received and concluded about the escapement of income without showing any independent application of mind. The reasons recorded did not evince a direct nexus or live link between the information received and the reasons recorded. Therefore, the Tribunal held that the reassessment proceedings were initiated without proper application of mind and were thus invalid.

2. Legitimacy of the Reassessment Proceedings for Collateral Purpose:
The assessee contended that the reassessment proceedings were initiated for a collateral purpose, i.e., to make a roving and fishing enquiry, as there was no material on record to conclude that the income had escaped assessment. The Tribunal, agreeing with the assessee, found that the reasons recorded by the AO were not based on any independent application of mind and were merely based on the information received from the Investigation Wing. This aligned with the principle laid down in 'Meenakshi Overseas (P) Ltd.', where the absence of a direct link between the information and the belief of income escapement rendered the reasons unsustainable.

3. Justification of the Addition of ?2,21,895/-:
The addition of ?2,21,895/- was based on the AO's conclusion that the transaction involving this amount was bogus and represented the assessee's income from undisclosed sources. However, since the reassessment proceedings themselves were found to be invalid due to the lack of proper application of mind by the AO, the addition made during such invalid proceedings could not be sustained. Consequently, the Tribunal cancelled the reassessment proceedings, rendering the addition of ?2,21,895/- unsustainable.

4. Justification of the Addition of ?3,500/- Towards Alleged Commission:
The assessee argued that the addition of ?3,500/- towards alleged commission estimated at 3.5% was made without any evidence to justify such expenditure. Given that the entire reassessment proceedings were invalidated, the Tribunal did not need to separately adjudicate this issue. The cancellation of the reassessment proceedings meant that all additions made during these proceedings, including the ?3,500/- towards alleged commission, were also unsustainable.

Conclusion:
The Tribunal concluded that the reasons recorded by the AO for the belief of income escapement were not valid due to the lack of independent application of mind. Consequently, the reassessment proceedings and all additions made therein were cancelled. The appeal was allowed in favor of the assessee.