2017 (7) TMI 1041 - AT - Income Tax

Reopening of assessment - Held that - AO simply acted upon the information received from the Investigation Wing and did not apply his own mind. Therefore, the reopening u/s 147 by issuing the notice u/s 148 of the Act only on the basis of information received from the Investigation Wing was not valid. Accordingly, the reassessment framed by the AO is held to be invalid and quashed. - Decided in favour of assessee.

Summary

Issues:
1. Validity of reassessment proceedings under Section 148 of the Income Tax Act, 1961.
2. Addition of amounts based on accommodation entries and unsecured loan.
3. Rejection of books of account and application of gross profit rate.
4. Allegation of firm not being engaged in actual business.
5. Addition confirmed despite regular business transactions.
6. Addition made without providing an opportunity for cross-examination.
7. Violation of principles of natural justice in passing the order without hearing the assessee.

Issue 1: Validity of reassessment proceedings under Section 148
The appeal challenged the initiation of provisions under Section 148 of the Income Tax Act, 1961. The Assessing Officer (AO) reopened the assessment based on information received from the Investigation Wing without applying independent judgment. The Tribunal held that the AO's action lacked the necessary application of mind as required by law. Citing a previous court decision, it emphasized that the AO must form a prima facie opinion on the basis of material before reopening an assessment. Since the AO failed to do so, the reassessment was deemed invalid and quashed.

Issue 2: Addition of amounts based on accommodation entries and unsecured loan
The AO added amounts to the assessee's income based on accommodation entries and an unsecured loan. The Tribunal noted that the AO did not provide any evidence to prove the genuineness of transactions or creditworthiness of the parties involved. The first appellate authority deleted one of the additions but upheld the addition based on gross profit rate. The Tribunal considered the lack of quantitative analysis and upheld the addition based on the gross profit rate applied by the AO.

Issue 3: Rejection of books of account and application of gross profit rate
The Tribunal observed that the first appellate authority rejected the books of account due to the absence of quantitative analysis, leading to the application of a specific gross profit rate. The Tribunal upheld this decision based on the previous year's gross profit rate, resulting in an additional amount being added to the assessee's income.

Issue 4: Allegation of firm not being engaged in actual business
The appeal contested the allegation that a certain firm was not engaged in actual business activities. The Tribunal noted that substantial inventory was found during a search, indicating that the firm was indeed conducting business. The Tribunal held that the rejection of the inference drawn by the AO without sufficient evidence was baseless and contrary to the facts on record.

Issue 5: Addition confirmed despite regular business transactions
Despite regular business transactions involving purchases and sales, the Tribunal noted that the addition was confirmed by the first appellate authority. The Tribunal found that the purchases were made and sold in the regular course of business, indicating that the addition was unwarranted.

Issue 6: Addition made without providing an opportunity for cross-examination
The Tribunal highlighted an issue where the addition was made without providing an opportunity for cross-examination. It was argued that the addition was based on material collected without allowing the assessee to cross-examine the relevant person. The Tribunal found this action to be untenable and a violation of the principles of natural justice.

Issue 7: Violation of principles of natural justice in passing the order without hearing the assessee
The Tribunal noted that the order was passed without giving the assessee an opportunity to be heard, which was deemed a gross violation of the principles of natural justice. The Tribunal emphasized the importance of providing such an opportunity before making decisions that affect the assessee's interests.

In conclusion, the Tribunal allowed the appeal, quashing the reassessment and highlighting various issues related to the validity of proceedings, additions made, rejection of contentions, and violations of principles of natural justice.