2018 (6) TMI 1317 - AT - Income Tax

Reopening of assessment - borrowed satisfaction - addition u/s 68 - non independent application of mind - accommodation entries - share application money - Held that - It looks from cursory reading from the impugned assessment order passed by AO that same is passed on merely borrowed satisfaction of investigation wing without independent application of mind by AO which is completely wrong and incorrect as AO u/s 148 while passing final order and before making addition of unexplained income under deeming provisions of section 68 etc cannot put cart before the horse and cannot pass the final assessment order just reproducing from investigation wing report which are made basis to reopen the case. The fact that present order is passed on mere basis of borrowed satisfaction only is evident if one compares the reasons recorded, show cause notice issued and final order as impugned before this Tribunal. At all three stages same and similar allegations are made dehors the evidences filed by assessee. Mere non production of Director of said share holder company cannot justify adverse inference u/s 68 of the Act. Even if there was any doubt if any regarding the creditworthiness of the share applicants was still subsisting, then AO should have made enquiries from the AO of the share subscribers as held by Hon ble High Court in CIT vs DATAWARE (2011 (9) TMI 175 - CALCUTTA HIGH COURT) which has not been done, so no adverse view could have been drawn. In this case on hand, the assessee had discharged its onus to prove the identity, creditworthiness and genuineness of the share applicants, thereafter the onus shifted to AO to disprove the documents furnished by assessee and in my view it cannot be brushed aside by the AO to draw the adverse view which here in present facts cannot be countenanced. Therefore addition made by AO and sustained by Ld CIT(A) are hereby deleted. - Decided in favour of assessee.

Issues Involved:
1. Validity of reopening action under Section 148 of the Income Tax Act.
2. Legitimacy of additions made under Section 68 of the Income Tax Act.
3. Non-production of directors and its impact on the genuineness of transactions.
4. Compliance with principles of natural justice.

Issue-wise Detailed Analysis:

1. Validity of Reopening Action under Section 148 of the Income Tax Act:
The Assessee challenged the reopening of the assessment under Section 148, arguing that it was mechanical and based on borrowed satisfaction without any case-specific and transaction-specific valid material. The Assessee cited various case laws, including G&G Pharma, Meenakshi Overseas, and RMG Polyvinyl, to support their contention. The Revenue countered by citing cases like Paramount Communications and Raymond Woollen Silk Mills, asserting that the reopening was justified. The Tribunal held that the reopening was invalid as the Assessing Officer (AO) did not independently apply his mind and relied solely on the Investigation Wing's report without providing the Assessee an opportunity to cross-examine the searched persons, thus violating principles of natural justice.

2. Legitimacy of Additions Made under Section 68 of the Income Tax Act:
The Assessee argued that the burden under Section 68 was fully discharged by providing all relevant documents, including PAN numbers, bank statements, and confirmations from shareholders. The AO made additions based on the non-production of directors and alleged accommodation entries. The Tribunal noted that the AO failed to discharge the secondary burden under Section 68 and relied on borrowed satisfaction from the Investigation Wing's report. The Tribunal emphasized that once the Assessee provided all necessary documents, the AO could not draw adverse inferences merely due to the non-production of directors. The Tribunal cited several case laws, including Softline Creation Pvt Ltd and Orchid Industries, to support this view and concluded that the additions were unjustified.

3. Non-Production of Directors and Its Impact on the Genuineness of Transactions:
The Tribunal held that the non-production of directors could not be a valid ground for making additions under Section 68 if the Assessee had provided all relevant documents to prove the genuineness of the transactions. The Tribunal referred to various case laws, including Rakam Money Matters Pvt Ltd and Crystal Networks (P.) Ltd., which held that the mere non-appearance of directors does not negate the documentary evidence provided by the Assessee.

4. Compliance with Principles of Natural Justice:
The Tribunal found that the AO violated principles of natural justice by not providing the Assessee an opportunity to cross-examine the persons whose statements were relied upon. The Tribunal referred to the Supreme Court's decision in Andaman Timber Industries, emphasizing that the violation of natural justice nullifies the proceedings. The Tribunal also noted that the AO did not independently verify the information provided by the Investigation Wing, which further invalidated the reopening and the subsequent additions.

Conclusion:
The Tribunal allowed the Assessee's appeal, holding that the reopening under Section 148 was invalid, and the additions under Section 68 were unjustified. The Tribunal emphasized the importance of independent application of mind by the AO and adherence to principles of natural justice. The Tribunal deleted the additions of ?25,00,000 and ?45,000 made by the AO and sustained by the CIT(A), and restored the returned income declared by the Assessee.

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