2019 (7) TMI 1311 - AT - Income Tax

Reopening of assessment u/s 147 - as recorded in reasons AO has reopened the assessment solely on the basis of suggestion/dictum of DGIT(Inv.), New Delhi - non application of mind being constitutes borrowed satisfaction - HELD THAT - From the reasons recorded by the AO, it is evident that he has formed reason to believe that income of ₹ 85,00,000/- has escaped assessment within the meaning of section 147 based on the suggestion of DDIT(Inv.), New Delhi that in the case of the assessee, notice u/s 148 of the Act for AY 2010-11 is required to be issued to bring to tax the undisclosed income regarding accommodation entry of ₹ 85,00,000/- obtained by the assessee. The provisions of section 147 mandates that reassessment proceedings can be attracted only if the AO has reason to believe that any income chargeable to tax has escaped assessment. It is the opinion and belief of the AO which initiates reassessment proceedings and not the suggestion of any superior or parallel authority. The suggestion of DDIT(Inv.) does not confer power to assume jurisdiction up on the AO to initiate reassessment proceedings. Therefore, in the present case, the reasons for initiating reassessment proceedings are against the spirit of provisions of section 147 of the Act and the notice issued u/s 148 of the Act on the suggestion of DDIT(Inv.) by the AO is bad in law. AO has proceeded to initiate reassessment proceedings u/s 147 of the Act and to issue notice u/s 148 of the Act without any application of mind and examination of the so called material and information received from the investigation wing to establish any nexus, even prima facie, with such information, by way of borrowed satisfaction and following Deepraj Hospital Pvt. Ltd. 2018 (6) TMI 496 - ITAT AGRA we accept the grievance of the assessee justified. As such, the impugned order, notice u/s 148 of the Act and reassessment proceedings u/s 147 are not sustainable in the eyes of law. - Decided in favour of assessee.

Issues Involved:
1. Validity of reassessment proceedings under Section 147 of the Income Tax Act, 1961.
2. Application of mind by the Assessing Officer (AO) in reopening the assessment.
3. Discharge of initial onus under Section 68 of the Income Tax Act.
4. Assessment of share capital contributions.
5. Non-earning of income by the appellant during the assessment year.
6. Non-provision of information and documents to the appellant.
7. Right to cross-examine witnesses.
8. Interest charge under Section 234B and initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.
9. Alleged arbitrariness and violation of natural justice in the appellate order.

Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 147:
The appellant challenged the validity of the reassessment proceedings, arguing that the AO reopened the assessment based on the suggestion of the DGIT(Inv.), New Delhi, without independent application of mind, constituting borrowed satisfaction. The Tribunal noted that the AO issued notice under Section 148 based on information from the DGIT(Inv.) related to the search case of an entry operator. The Tribunal emphasized that the AO must have "reasons to believe" that income has escaped assessment, which should be based on independent application of mind and not merely on borrowed satisfaction. The Tribunal found that the AO’s reasons were solely based on the suggestion from the DGIT(Inv.) without any independent verification or application of mind, thus constituting borrowed satisfaction.

2. Application of Mind by the AO:
The Tribunal observed that the AO did not independently verify the information received from the DGIT(Inv.) and merely acted on the suggestion to issue notice under Section 148. The Tribunal cited several authoritative decisions, including "PCIT vs. Meenakshi Overseas (P) Ltd.," which held that mere reliance on information received without independent application of mind is unsustainable. The Tribunal concluded that the AO's action was mechanical and lacked independent application of mind, rendering the reassessment proceedings invalid.

3. Discharge of Initial Onus under Section 68:
The appellant argued that it had discharged the initial onus under Section 68 by providing names, addresses, and PAN details of the shareholders. The Tribunal noted that if the appellant provides sufficient details, the onus shifts to the Revenue to verify the creditworthiness of the shareholders. The Tribunal emphasized that without proper verification, the addition under Section 68 cannot be sustained.

4. Assessment of Share Capital Contributions:
The appellant contended that the share capital contributions could not be assessed in its hands unless the department showed that the amount emanated from the appellant’s coffers. The Tribunal agreed, stating that the AO failed to bring any specific material to support that the share capital of ?88 lakhs was the appellant's own money. The Tribunal held that the addition made under Section 68 was arbitrary and deserved to be deleted.

5. Non-Earning of Income by the Appellant:
The appellant argued that it did not earn any income during the assessment year, which was accepted by the AO, negating the presumption of undisclosed cash provided to shareholders. The Tribunal found this argument valid, further supporting the deletion of the addition under Section 68.

6. Non-Provision of Information and Documents:
The appellant claimed that it was not provided with the information and documents used against it, violating the principle of natural justice. The Tribunal emphasized that reasonable opportunity for rebuttal must be provided if material collected is used against the appellant. The failure to do so resulted in a miscarriage of justice.

7. Right to Cross-Examine Witnesses:
The appellant argued that it should have been allowed to cross-examine witnesses whose statements were used against it. The Tribunal agreed, stating that the appellant should have been confronted with the statements and allowed an opportunity to cross-examine the witnesses, adhering to the principles of natural justice.

8. Interest Charge under Section 234B and Penalty Proceedings under Section 271(1)(c):
The appellant challenged the interest charge under Section 234B and the initiation of penalty proceedings under Section 271(1)(c). The Tribunal, having found the reassessment proceedings invalid, implied that the consequential charges and penalties were also unsustainable.

9. Alleged Arbitrariness and Violation of Natural Justice:
The appellant claimed that the appellate order was arbitrary and against natural justice. The Tribunal, agreeing with the appellant’s arguments on various grounds, concluded that the reassessment proceedings and the appellate order were indeed arbitrary and violated principles of natural justice.

Conclusion:
The Tribunal quashed the reassessment proceedings, notice under Section 148, and all consequent orders, finding them invalid due to lack of independent application of mind by the AO and violation of principles of natural justice. The appeal was allowed in favor of the appellant.

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