2016 (3) TMI 923 - AT - Income Tax

Reopening of assessment - receipt of accomadation enteries - Held that - It is pertinent to mention that once from the details received from the DIT (Inv.) the dates on which alleged accommodation entries were provided is known to the AO, it would not have been difficult for the AO, if he had infact undertaken the exercise of verification of assessment records of the assessee to make a reference to the manner in which those disputed entries were provided or mentioned in the books of accounts of the assessee, which must have submitted along with respective return of income filed for AY 2004-05. In the event of examination of assessment records the AO could verify the stand of the assessee that the alleged amount received is the sale proceeds of shares which were held as stoke in trade as opening balance in the beginning of the financial period which was also taken into account in the sales and duty reflected and recorded in the P & L a/c. The basic requirement is that the AO must apply his mind to the materials in order to have reason to believe that the income of the assessee has escaped assessment and without forming a prima facie opinion, on the basis of such material that income has escaped assessment the AO can not assume valid jurisdiction to initiate proceedings and to issue notice u/s 147/148 of the Act. - Notice u/s 148 quashed - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of the order passed under Section 144.
2. Validity of the assessment order served before disposing of preliminary objections under Section 147.

Detailed Analysis:

1. Validity of the Order Passed Under Section 144
The first issue concerns whether the CIT(A) was justified in upholding the order dated 09.11.11 passed under Section 144 of the Income Tax Act, which involves the assumption of jurisdiction for recording reasons, its approval, and adherence to the limitation period.

The assessee's representative argued that the reasons recorded by the Assessing Officer (AO) were merely a reproduction of vague information received from the Director of Income Tax (Investigation), New Delhi. The AO proceeded to make additions without verifying and examining the facts, details, and without application of mind, acting mechanically. The representative relied on the Delhi High Court's decision in Pr. CIT vs. G & G Pharma, which emphasized that the AO must apply his mind to the information received and independently form a belief that income had escaped assessment.

The Departmental Representative countered that the AO had detailed and factually correct information from the DIT (Investigation) and had recorded satisfaction as per the provisions of Section 147/148 before initiating proceedings.

Upon consideration, it was evident that the AO initiated proceedings and issued notices solely based on information from the DIT (Investigation) without further verification or examination. The AO did not mention the nature of the transaction or the date of recording reasons. The Tribunal cited the Supreme Court's rulings in Chhugamal Rajpal v. SP Chaliha and ACIT v. Dhariya Construction Co., which underscored that the AO must apply his mind to the information and form a belief based on it. The Tribunal concluded that the AO's action was mechanical and lacked independent application of mind, rendering the initiation of proceedings under Section 147 invalid.

2. Validity of the Assessment Order Served Before Disposing of Preliminary Objections Under Section 147
The second issue was whether the CIT(A) was justified in upholding the assessment order served before disposing of preliminary objections dated 16.11.11 for invoking jurisdiction under Section 147.

The Tribunal noted that the AO initiated proceedings and issued notices under Section 147/148 based on information from the DIT (Investigation) without independent verification or examination. The Tribunal referenced the Delhi High Court's decision in Pr. CIT vs. G & G Pharma, which held that the AO must apply his mind to the materials and form a belief that income had escaped assessment. The Tribunal found that the AO's actions were mechanical and lacked independent application of mind, making the reassessment proceedings invalid.

The Tribunal also cited its own decision in the case of DLIT vs. Shri Devesh Kumar, where it was held that the AO must independently verify information and form a belief that income had escaped assessment. The Tribunal reiterated that the AO's failure to apply his mind and the absence of a date in the recorded reasons indicated a mechanical and casual approach, invalidating the reassessment proceedings.

Conclusion
The Tribunal allowed the appeal on legal grounds, quashing the notice issued under Section 148 and all subsequent proceedings, including the reassessment order passed under Section 143(3) read with Section 147. Consequently, the other grounds on merits became academic and infructuous. The appeal was allowed in favor of the assessee.

Order Pronounced
The order was pronounced in the court on 19/02/2011.