2019 (7) TMI 1411 - AT - Income Tax

Reopening assessment proceedings u/s 147 - reason to suspect OR reason to believe - non-application of mind - HELD THAT - Action of the AO has been taken mechanically on the basis of alleged report of Investigation Wing. The mere recording/ formulation of reasons on the basis of reproduction of information from Investigation Wing and, issuing notice for initiation of re-assessment proceedings does not constitute application of mind much less independent application of mind. Hence, the proceedings are without jurisdiction. It is settled law that AO cannot act mechanically on the basis of report of Investigation Wing and to show that the AO has applied his mind, he must distinct all those materials and he must also show that what was material on record. Hence, initiation of proceedings is also based on non-application of mind much less independent application of mind. Assessee are exactly on similar facts and circumstances of the present case, hence, respectfully following the precedent in the case of Mohan Aggarwal, ACIT, 2019 (2) TMI 109 - ITAT DELHI that view that proceedings initiated by invoking the provisions of section 147 by the AO and upheld by the CIT(A) are nonest in law, without jurisdiction and without applying his mind. Hence, the reassessment is quashed and accordingly, allow the legal grounds raised by the assessee. No other ground has been adjudicated as the same has not been argued by the Ld. Counsel for the assessee.

Issues Involved:
1. Legality of reopening assessment proceedings under section 147.
2. Validity of reasons recorded for reopening the assessment.
3. Confirmation of addition of ?5,08,116/- as alleged profit from F&O transactions.
4. Application of mind by the Assessing Officer (AO) in reopening the assessment.
5. Validity of the assessment order based on external information without independent verification.
6. Rejection of documents and evidence submitted by the assessee.
7. Assumption and presumption by the AO without concrete evidence.

Detailed Analysis:

1. Legality of Reopening Assessment Proceedings under Section 147:
The assessee contended that the reopening of assessment under section 147 was based on "reason to suspect" rather than "reason to believe," making it illegal and without jurisdiction. The tribunal noted that the AO had initiated the proceedings based on information from the Investigation Wing without conducting any independent inquiry. It was held that the AO must have tangible and relevant material to form a belief that income has escaped assessment, which was missing in this case. Thus, the reopening was quashed as it was based on non-application of mind and merely on the Investigation Wing's report.

2. Validity of Reasons Recorded for Reopening the Assessment:
The tribunal scrutinized the reasons recorded by the AO, which were primarily based on the Investigation Wing's report about client code modification (CCM) used for tax evasion. The AO had not quantified the amount of escapement in the reasons recorded. It was found that the reasons were not sufficient to form a valid "reason to believe" that income had escaped assessment, as required under section 147. The tribunal emphasized that the reasons must be based on relevant material and not on assumptions or presumptions.

3. Confirmation of Addition of ?5,08,116/- as Alleged Profit from F&O Transactions:
The AO had added ?5,08,116/- to the assessee's income, alleging it as profit from F&O transactions based on information from the Investigation Wing. The tribunal observed that the AO had not independently verified the information or substantiated the addition with concrete evidence. The assessee had provided documents and explanations, which were not duly considered by the AO. The tribunal held that the addition was made mechanically without proper verification and application of mind.

4. Application of Mind by the AO in Reopening the Assessment:
The tribunal found that the AO had acted mechanically based on the Investigation Wing's report without conducting any independent inquiry or verification. The reasons recorded for reopening the assessment were mere reproductions of the information received, lacking independent application of mind. The tribunal emphasized that the AO must independently apply his mind to the material on record before forming a belief that income has escaped assessment.

5. Validity of the Assessment Order Based on External Information Without Independent Verification:
The tribunal noted that the AO had relied solely on external information from the Investigation Wing without conducting any independent verification or inquiry. It was held that the AO must substantiate the information received with independent evidence before making any additions to the assessee's income. The assessment order was quashed as it was based on unverified external information.

6. Rejection of Documents and Evidence Submitted by the Assessee:
The assessee had submitted various documents and explanations to substantiate the F&O transactions and the absence of CCM. The AO had rejected these documents without pointing out any specific defects or shortcomings. The tribunal observed that the AO had arbitrarily rejected the evidence without proper consideration, which was not justified.

7. Assumption and Presumption by the AO Without Concrete Evidence:
The tribunal found that the AO had made the addition based on assumptions and presumptions without bringing any concrete evidence on record. The AO had presumed that the assessee had reduced his profit through CCM without any supporting evidence. The tribunal held that such assumptions and presumptions could not form the basis for making additions to the assessee's income.

Conclusion:
The tribunal quashed the reassessment proceedings initiated under section 147, holding that the AO had acted mechanically based on unverified information from the Investigation Wing without independent application of mind. The reasons recorded for reopening the assessment were found to be insufficient and based on assumptions and presumptions. The addition of ?5,08,116/- was also quashed as it was made without proper verification and consideration of the evidence submitted by the assessee. The appeal of the assessee was allowed.

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