2019 (3) TMI 1670 - AT - Income Tax

Reopening of assessment u/s 147 - as argued reasons recorded are based on borrowed satisfaction without independent application of mind - Non independent application of mind by AO - HELD THAT - Examining validity of extant reopening strictly on basis of reasons recorded which are approved by PCIT and are communicated to assessee , we find it very difficult to fathom and understand what was in mind of AO so that he has reopened the present case . As evident from reasons which are reproduced elsewhere in this order it would be clear like broad day light that reasons are recorded without independent application of mind on part of AO who has recorded reasons on basis of rumor and suspicion only. When we read reasons line by line we find that reasons are simply and solely based on undescribed and un-narrated letter of ITO Ward 11(3) New Delhi like a borrowed satisfaction. Phrases like on going through the list of accommodation entries provider and the assessee has introduced his own money which has not been offered for taxation clearly tells the tale that reasons are recorded without any tangible material and without any live nexus. Reasons fail on following significant aspects like wrong mentioning of return filing status in reasons format, no description at all about composition of income escapement alleged to be of ₹ 2.93 crores which amount is also not correct , mechanical and ritualistic approval of PCIT who has also not bothered to examine reasons independently thus reducing the approval to a empty ritual. AO has not even cared and taken pains to describe the composition of income escapement of ₹ 2.93 crores which has fractured the entire reopening and reasons are based on the dictate and/or satisfaction of some other authority that is ITO Ward 11(3) New Delhi which is not countered by Ld DR and Ld CIT(A) in impugned order. On basis of aforesaid discussions and respectfully following the precedents, as aforesaid, we accept both the pleas raised by Ld AR and reject the arguments of Ld DR and hold that Ld CIT(A) wrongly approved the reopening action of AO and thus reverse the findings of Ld CIT(A) on these count and accordingly hold that AO wrongly reopened the case of assessee u/s 147 on basis of mechanical reasons simply based on borrowed satisfaction of ITO Ward 11(3) New Delhi which are approved in perfunctory manner by PCIT and gravely violated principle of natural justice in reopening proceedings, and thus quash the reassessment and cancel the orders of the authorities below. Since we have quashed the reassessment in the case of the assessee, thus grounds on merits of the case has become academic - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening the assessment under Section 147 of the Income Tax Act.
2. Violation of principles of natural justice due to lack of cross-examination of witnesses.

Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147:
The primary issue raised by the assessee was the validity of the reopening of the assessment under Section 147 of the Income Tax Act. The assessee argued that the reasons recorded for the reopening were vague, lacked coherence, and were based on incorrect facts. Specifically, the reasons recorded by the Assessing Officer (AO) mentioned an incorrect amount of ?2.93 crores as the alleged income escapement, which was later found to be ?1.75 crores. The AO also incorrectly noted that the assessee had not filed a return, which was factually incorrect as the return was filed on 30.09.2011.

The Tribunal found merit in the assessee's arguments, noting that the reasons recorded were based on borrowed satisfaction without independent application of mind by the AO. The reasons were found to be non-communicative and lacked a live nexus between the material facts and the belief of income escapement. The Tribunal cited several precedents, including the Delhi High Court's decision in Signature Hotels (338 ITR 51), which emphasized the necessity of a live link between the material and the belief of income escapement.

The Tribunal observed that the approval by the Principal Commissioner of Income Tax (PCIT) was mechanical and lacked due diligence. The Tribunal concluded that the reasons recorded by the AO did not meet the legal requirements and thus quashed the reopening of the assessment.

2. Violation of Principles of Natural Justice:
The second issue raised was the violation of principles of natural justice due to the lack of cross-examination of witnesses whose statements were heavily relied upon by the AO. The assessee argued that the statements of Mr. Himanshu Verma, which were used to draw adverse inferences under Section 68 of the Act, were provided at the fag end of the assessment proceedings, and no opportunity for cross-examination was given.

The Tribunal agreed with the assessee, noting that the AO failed to provide a fair opportunity for cross-examination, which is a fundamental aspect of natural justice. The Tribunal highlighted the Income Tax Department's office manual, which mandates offering cross-examination before relying on any statement against the assessee. The Tribunal found that the lack of cross-examination constituted a fatal infirmity in the assessment proceedings.

Conclusion:
The Tribunal quashed the reassessment proceedings on both counts: the invalidity of the reopening under Section 147 due to non-application of mind and borrowed satisfaction, and the violation of principles of natural justice due to the lack of cross-examination. The orders of the lower authorities were canceled, and the appeals of the assessee were partly allowed.