2018 (12) TMI 1451 - AT - Income Tax

Reopening of assessment - receipt of accommodation entries - Held that - Assessing Officer referred to the information and the two directions as reasons on the basis of which he was proceeding to issue notice under Section 148. We are afraid that these cannot be the reasons for proceeding under Section 147/148 of the said Act. The first part is only an information and the second and the third parts of the beginning paragraph of the so-called reasons are mere directions. From the so-called reasons it is not at all discernible as to whether the Assessing Officer had applied his mind to the information and independently arrived at a belief that on the basis of the material which he had before him income had escaped assessment. Consequently we find that the Tribunal has arrived at the correct conclusion on facts. The law is well settled. See Rajendra Prasad vs. ITO 2018 (10) TMI 143 - ITAT DELHI - Decided in favour of assessee.

Issues Involved:
1. Validity of reasons recorded under Section 148 to assume jurisdiction under Section 148 of the Income Tax Act.
2. Arbitrary additions made by the Assessing Officer (AO) and confirmed by the CIT(A).
3. Application of adhoc estimated rate of profit by the AO.
4. Additions on account of expenditure incurred from undisclosed sources.
5. Additions on account of ESIC payable.
6. Non-confrontation of back material to the assessee in accordance with the principle of natural justice.

Detailed Analysis:

1. Validity of Reasons Recorded Under Section 148:
The primary issue in all five appeals is the validity of the reasons recorded under Section 148 to assume jurisdiction under Section 148 of the Income Tax Act. The appellants argued that the reasons recorded were not validly recorded in accordance with the law, leading to subsequent actions being void ab initio.

The Tribunal examined the facts and found that the reasons recorded were based on information received from the ACIT, Central Circle-10, New Delhi, regarding accommodation entries provided by certain individuals. It was noted that the reasons lacked independent application of mind and were based on borrowed satisfaction. The Tribunal referred to a similar case, Rajendra Prasad vs. ITO, where it was held that reopening of the assessment without independent application of mind and examination of facts is invalid.

The Tribunal concluded that the reasons recorded were not validly recorded as they were based on borrowed satisfaction, lacked independent application of mind, and did not confront the assessee with incriminating material. Consequently, the reopening of the assessment under Section 148 was deemed invalid, and all subsequent actions, including the notice issued under Section 148, the order passed by the AO, and the CIT(A)'s order, were void ab initio.

2. Arbitrary Additions Made by the AO and Confirmed by the CIT(A):
The appellants contested the arbitrary additions made by the AO, which were confirmed by the CIT(A). The AO rejected the defect-free books of accounts and applied an adhoc estimated rate of profit without any basis or incriminating material.

The Tribunal noted that the AO's actions were arbitrary and lacked proper justification. The additions were made without requisite show cause notice and without objectively overruling documentary evidence placed on record. The Tribunal held that such exercise is not permissible in the eyes of the law.

3. Application of Adhoc Estimated Rate of Profit:
The AO applied an adhoc estimated rate of profit ranging from 9.5% to 27.52% without any basis or incriminating material. The Tribunal found that the application of such adhoc rates was arbitrary and without proper justification. The AO failed to provide a valid basis for rejecting the defect-free books of accounts and applying the estimated rates.

4. Additions on Account of Expenditure Incurred from Undisclosed Sources:
The AO made additions on account of expenditure incurred from undisclosed sources, alleging commission paid to entry operators. The Tribunal found these additions to be perverse and lacking proper justification. The AO did not confront the assessee with any back material or incriminating evidence, violating the principle of natural justice.

5. Additions on Account of ESIC Payable:
The AO made additions on account of ESIC payable. The Tribunal found these additions to be arbitrary and lacking proper justification. The AO failed to provide a valid basis for such additions, and the CIT(A) erred in confirming them.

6. Non-Confrontation of Back Material to the Assessee:
The appellants argued that no back material or incriminating evidence was adequately and lawfully confronted to them, violating the principle of natural justice. The Tribunal agreed with this contention, noting that the AO failed to confront the assessee with any incriminating material, making the reopening of the assessment null and void.

Conclusion:
The Tribunal allowed all five appeals, holding that the reasons recorded under Section 148 were not validly recorded, leading to the reopening of the assessment being invalid. Consequently, all subsequent actions, including the notice issued under Section 148, the order passed by the AO, and the CIT(A)'s order, were void ab initio. The Tribunal did not adjudicate the grounds on merit as they became academic in nature.

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