2017 (6) TMI 493 - AT - Income Tax

Reopening of assessment - receipt of share application money - Held that - Since original return was processed u/s 143(1), only one conditions viz. reasons to believe that the income has escaped assessment was required to be fulfilled by the AO and nothing more. However, it is also well settled principle that the AO must be in possession of some tangible material so as to justify the reopening and that material should lead to formation of belief on the part of the AO that certain income has escaped assessment and also the material should have live link with the formation of the belief, which in our opinion is missing in the instant case. From the material on record, it is clear that the assessee has not received any share application money from the said group rather it has received share application money from two persons namely B.P.Choudhary and Saroj Choudhary. The revenue could not bring on record any linkage of these two persons with G.V. and his group. The only basis of initiating reassessment proceedings seems to be the statement made by G.V. who admitted to having advanced accommodation entries to the assessee in exchange for cash against commission. But, we find no nexus between the statements of the G.V. vis- -vis assessee s share applicants. Therefore, prima facie the primary condition of initiating reassessment proceedings in the instant case is not fulfilled. - Decided in favour of assessee.

Summary

Issues Involved: Reopening of assessment based on share application money, validity of reassessment proceedings, legal grounds for reopening assessment, sufficiency of evidence for forming belief of income escaping assessment.

Analysis:

1. Reopening of Assessment based on Share Application Money:
The appeal by the assessee for Assessment Year 2004-05 challenges the order of the Ld. Commissioner of Income Tax (Appeals)-39 on legal grounds and merits. The assessee, a resident corporate assessee, was subjected to assessment under section 143(3) read with Section 147 of the Income Tax Act, 1961. The assessment was reopened based on a search operation revealing accommodation entries in the form of share application money. The AO believed that the share application money received by group concerns introduced unaccounted money in the form of bogus share capital. The assessee objected to the reopening, stating no application money was received from the concerned party during the impugned assessment year. The AO added the amount of share application money as income under section 68. The assessee contested this before the Ld. CIT(A) without success, leading to the appeal before the ITAT.

2. Validity of Reassessment Proceedings:
The legal ground for reopening the assessment was challenged by the assessee, arguing that the reopening was solely based on a third party's statement, which did not involve the assessee. The Tribunal noted that the AO must have tangible material justifying the reopening, which should have a live link with the belief that income has escaped assessment. In this case, the material did not establish a connection between the third party's statement and the share applicants of the assessee. The Tribunal referred to a previous decision in the assessee's case for AY 2003-04 where a similar reopening was quashed due to lack of nexus between the evidence and the belief of income escaping assessment. Consequently, the reassessment proceedings were deemed invalid, and the assessment order was set aside.

3. Legal Grounds for Reopening Assessment:
The Ld. Counsel for the assessee argued that the reopening was not valid as the original return was processed under section 143(1), and the condition of reasons to believe that income has escaped assessment was not adequately fulfilled. On the contrary, the Ld. Departmental representative contended that the reopening was valid based on the admission of the third party regarding accommodation entries. The Tribunal agreed that the primary condition for initiating reassessment was not met as there was no direct link between the third party's statement and the assessee's share applicants. The Tribunal emphasized the necessity of a valid belief for a lawful exercise of power in reopening assessments.

4. Sufficiency of Evidence for Forming Belief of Income Escaping Assessment:
The Tribunal highlighted the importance of tangible material leading to the formation of a belief that income has escaped assessment. In this case, the lack of nexus between the third party's statement and the assessee's transactions raised doubts about the validity of the reassessment proceedings. Citing a judicial precedent and the factual matrix, the Tribunal concluded that the reassessment lacked a valid jurisdiction, ultimately leading to the quashing of the assessment order.

5. Conclusion:
As the reassessment proceedings were quashed, the other grounds raised in the appeal became irrelevant, and the assessee's appeal was allowed. The judgment emphasized the necessity of a valid belief supported by tangible material for the lawful reopening of assessments.

The ITAT Mumbai, in its judgment, thoroughly analyzed the legal grounds for reopening assessments based on share application money, emphasizing the importance of a valid belief supported by tangible material. The Tribunal's decision highlighted the need for a direct nexus between the evidence and the belief of income escaping assessment to ensure the validity of reassessment proceedings. Ultimately, the reassessment was deemed invalid due to the lack of connection between the third party's statement and the assessee's transactions, leading to the quashing of the assessment order.