2017 (10) TMI 1208 - AT - Income Tax

Reopening of assessment - Held that - The reasons recorded by the AO in this matter solely basing on the information received from the Directorate of Investigation without any independent exercise of mental process cannot be construed as reasons to believe and the consequent proceedings of reopening are bad under law. Further, the approval/sanction of the Addl. CIT, Range 6, New Delhi is also not in accordance with the requirements of Section 151 of the Act, as is held in M/s S. Goyanka Lime and Chemicals Ltd. 2015 (5) TMI 217 - MADHYA PRADESH HIGH COURT and this also vitiates the proceedings. For these reasons, we hold that the reopening proceedings are bad under law and are liable to be quashed. Since, we are quashed the proceedings on the questions of law, we do not deem it necessary to adjudicate the merits of additions made in this matter. Appeal of the assessee is allowed.

Issues Involved:
1. Legality of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Confirmation of addition of ?20,00,000 as unexplained income under Section 68 of the Income Tax Act, 1961.
3. Confirmation of addition of ?40,000 as alleged commission paid.
4. Validity of the reasons given by the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) (CIT(A)) for the additions.

Issue-wise Detailed Analysis:

1. Legality of the Notice Issued Under Section 148 of the Income Tax Act, 1961:
The assessee challenged the legality of the notice issued under Section 148, arguing that the notice was "illegal, void and without jurisdiction." The AO based the reopening of the assessment on information from the Investigation Wing, which indicated that the assessee was involved in money laundering by giving unaccounted cash to entry operators in exchange for cheques and DDs under the guise of share application money. The Tribunal found that the AO did not independently verify the information from the Investigation Wing and merely relied on it to form a belief that income had escaped assessment. Citing several cases, including Pr. CIT vs. Meenakshi Overseas Pvt. Ltd. and CIT vs. Goyanka Lime & Chemicals Ltd., the Tribunal held that reopening based solely on such information without independent application of mind by the AO is invalid. Additionally, the Tribunal noted that the approval for issuing the notice was given mechanically, which further invalidated the proceedings.

2. Confirmation of Addition of ?20,00,000 as Unexplained Income Under Section 68:
The AO added ?20,00,000 to the assessee's income as unexplained credits, based on the information that the share application money was received from paper companies lacking genuine business activities. The CIT(A) upheld this addition, stating that the assessee failed to prove the creditworthiness and genuineness of the transactions. However, the Tribunal found that the assessee had provided sufficient documentation, including PAN cards, ITR acknowledgements, and audited statements of the companies from which the share application money was received. The Tribunal also noted that in a similar case for AY 2005-06, the CIT(A) had deleted the addition, and the decision was upheld by the Tribunal. Therefore, the Tribunal concluded that the addition of ?20,00,000 was not justified.

3. Confirmation of Addition of ?40,000 as Alleged Commission Paid:
The AO also added ?40,000 as commission paid to entry operators, which was upheld by the CIT(A). The Tribunal found that this addition was based on the same flawed reasoning as the ?20,00,000 addition. Since the reopening of the assessment itself was invalid, the addition of ?40,000 as commission was also deemed unsustainable.

4. Validity of the Reasons Given by AO and CIT(A) for the Additions:
The Tribunal scrutinized the reasons provided by the AO and CIT(A) for making and confirming the additions. It found that the reasons were based on borrowed satisfaction from the Investigation Wing's report without any independent verification or application of mind. The Tribunal held that such reasons could not form a valid basis for reopening the assessment or making additions. The Tribunal emphasized that the AO must independently examine the facts and not merely rely on external information to form a belief that income has escaped assessment.

Conclusion:
The Tribunal quashed the reopening proceedings on legal grounds, finding that both the notice under Section 148 and the approval for reopening were invalid. Consequently, the additions of ?20,00,000 and ?40,000 were also quashed. The appeal of the assessee was allowed, and the orders of the authorities below were set aside.

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