2018 (12) TMI 1819 - AT - Income Tax

Reopening of assessment u/s 147 - Bogus purchases addition - information received from investigation wing of the department - borrowed satisfaction v/s independent application of mind - HELD THAT - On the basis certain information received from the Investigation Wing Mumbai, the AO has not just formed an opinion but has finally concluded that the assessee has benefitted by obtaining accommodation entries from M/s New Planet Trading Co Ltd. - AO has stated that since the assessee has not filed the return of income as per AST system of the department, he has reasons to believe that income has escaped assessment. Such an approach of the AO where, based on information received in context of a third party, even before issuance of notice u/s 148 has concluded that assessee has obtained accommodation entries and income to that extent has escaped assessment is not a correct approach in the eyes of law. As held in case of M/s Shodiman Investments 2018 (4) TMI 1287 - BOMBAY HIGH COURT the material in possession of the AO has to be further linked by any reason to come to conclusion that the assessee has indulged in any activity which could give rise to reason to believe that income chargeable to tax has escaped assessment - unless the AO carries out the further examination after receipt of initial information from the Investigation wing, how can he conclude that income has escaped assessment. It is a fact that the assessee has filed her return of income. AO should have examined her return of income and carried out initial investigation before coming to the conclusion that income has escaped assessment. - Decided in favour of assessee.

Summary

Issues:
1. Rejection of objection for initiation of reassessment proceedings.
2. Sustaining addition of alleged bogus purchases.
3. Alleged bogus purchases through accommodation entries.
4. Making addition based on information from the investigation wing without allowing cross-examination.
5. Reopening of assessment based on incorrect facts.
6. Legal validity of the notice issued for reassessment.

1. Rejection of Objection for Reassessment:
The appellant raised an objection regarding the recording of wrong facts for the initiation of reassessment proceedings. The AO concluded that the appellant obtained accommodation entries from a specific party without proper verification. The CIT(A) partially allowed relief but did not fully accept the appellant's arguments. The Tribunal emphasized the need for independent verification before concluding that income has escaped assessment, highlighting the importance of proper examination before initiating reassessment proceedings.

2. Sustaining Addition of Alleged Bogus Purchases:
The AO disallowed a portion of alleged unverifiable purchases and added it to the appellant's income based on information from the Investigation Wing. The CIT(A) reduced the disallowance but did not fully accept the appellant's contentions. The Tribunal held that the AO's approach, solely based on information from a third party without proper examination, was incorrect. The Tribunal quashed the reassessment proceedings, emphasizing the necessity of linking initial information with further examination before concluding income escapement.

3. Alleged Bogus Purchases Through Accommodation Entries:
The AO alleged that the appellant obtained accommodation entries from a specific party, leading to the disallowance of a portion of purchases. The CIT(A) reduced the disallowance but maintained a portion. The Tribunal highlighted the need for proper verification and examination before making such conclusions, emphasizing the importance of independent inquiry to establish the genuineness of transactions.

4. Making Addition Based on Information Without Cross-Examination:
The AO relied on information from the Investigation Wing without allowing the appellant to cross-examine witnesses. The Tribunal held that such reliance without providing an opportunity for cross-examination violated principles of natural justice. The Tribunal emphasized the importance of allowing the appellant to challenge and verify the information used as a basis for additions to income.

5. Reopening of Assessment Based on Incorrect Facts:
The AO initiated reassessment based on incorrect information, alleging that the appellant did not file the original return. The Tribunal found that the AO did not apply his mind independently before issuing the notice for reassessment. The Tribunal emphasized the requirement for the AO to have a reasonable belief based on proper examination before initiating reassessment proceedings.

6. Legal Validity of Notice for Reassessment:
The Tribunal found that the notice issued for reassessment was not legally sustainable as it was based on information from a third party without proper verification. The Tribunal quashed the reassessment proceedings, highlighting the necessity for the AO to conduct a thorough examination before concluding that income has escaped assessment. The appeal of the assessee was allowed, and the reassessment proceedings were set aside.