2020 (1) TMI 1070 - HC - Income Tax

Reopening of assessment u/s 147 - assumption of jurisdiction by the AO under Section 147 - unpaid loan liability - HELD THAT - AO has accepted genuineness of the loan transaction. The reasons are completely silent as to how and on what basis material or evidence the AO has come to the conclusion that the loan transaction was an amount received without consideration so as to bring the same within the ambit of Section 56 of the Act. The nature of the transaction depends solely on the intention of the parties. Both the parties have admitted that the same is an interest bearing loan a fact accepted by the AO. AO has thus not shown any rational for involving Section 56 to the transaction of loan. The reasons are completely and wholly silent as to how the provisions of Section 56 are attracted in respect of outstanding liability of loan. Moreover the reasons also do not spell out as to how there has been escapement of income by the assessee. The approach of the AO is fundamentally flawed as he has assumed that just because certain loan amount is outstanding the same was liable to be added to the income of the petitioner-assessee. Applying the test of prima facie evaluation of reasons for determining whether the commencement of reassessment proceedings is valid or not we have no hesitation to say that there is nothing on record to justify the reopening. We are also not impressed by the contention of the Revenue that reopening of assessment is justified and necessary as there are discrepancies in the return originally filed and the return filed in response to the notice under Section 148 of the Act by the assessee. At this stage we are only concerned with the fact whether the reasons as recorded by the AO showcase due application of mind. The reasoning does not indicate the basis for coming to the conclusion that the petitioner s taxable income has escaped assessment and the reasons formulated by the AO are based on a fundamentally flawed approach. We do not find any such material or basis to justify the reopening of the assessment. Resultantly the writ petition is allowed. The notice under Section 148 of the Act and the proceedings emanating therefrom are hereby quashed. - Decided in favour of assessee.

Issues Involved:
1. Legality of the notice under Section 148 of the Income-Tax Act for reopening the assessment.
2. Whether the Assessing Officer (AO) applied due diligence and independent enquiry in reopening the assessment.
3. Validity of the reasons to believe that income had escaped assessment.
4. Applicability of Section 56(2) and 56(2)(vii)(a) of the Income-Tax Act to the loan transaction.
5. Whether the reopening of assessment was justified based on discrepancies in the returns filed.

Issue-wise Detailed Analysis:

1. Legality of the Notice under Section 148:
The petitioner challenged the notice under Section 148 dated 29.03.2018, arguing it was issued without proper application of mind. The court examined the reasons for reopening the assessment and found that the AO had recorded the reasons under the head "WHERE NO RETURN IS FILED BY THE ASSESSEE," which was incorrect as the petitioner had filed a return on 15.07.2011. The court noted that this mistake was not merely clerical but indicated a lack of awareness by the AO about the original return, thus vitiating the basis for reopening.

2. Due Diligence and Independent Enquiry by AO:
The petitioner argued that the AO acted mechanically, relying solely on the report from the Investigation Unit without independent verification. The court observed that the AO had indeed reproduced the investigation report verbatim without independent enquiry. The AO's letter dated 22.03.2018, calling for information, incorrectly stated that no return was filed by the petitioner, further showing a lack of due diligence.

3. Validity of the Reasons to Believe:
The court scrutinized the reasons to believe that income had escaped assessment. The AO's reasons were based on the loan transaction with M/s. Duggal Associates, which was confirmed by both parties as a genuine loan. The AO assumed that the unpaid loan amount of ?17,17,320 was income escaping assessment under Section 56(2) and 56(2)(vii)(a). The court found this reasoning flawed as the AO did not dispute the loan's genuineness but still treated the unpaid amount as income without proper basis.

4. Applicability of Section 56(2) and 56(2)(vii)(a):
The court examined whether the unpaid loan could be considered income under Section 56(2) and 56(2)(vii)(a). It noted that these sections apply to sums received without consideration. However, in this case, the loan was an interest-bearing transaction, and both parties acknowledged it as such. The AO's reasoning did not demonstrate how the loan amount was without consideration, making the application of these sections inappropriate.

5. Justification of Reopening Based on Return Discrepancies:
The Revenue argued that discrepancies between the original return and the return filed in response to the notice justified reopening. The court, however, focused on whether the AO's recorded reasons indicated due application of mind. It found that the reasons were fundamentally flawed, as they did not establish a basis for concluding that the petitioner's income had escaped assessment. The court emphasized that the AO's approach was incorrect and did not justify reopening.

Conclusion:
The court concluded that the AO's reasons for reopening the assessment were based on a fundamentally flawed approach and lacked proper application of mind. The notice under Section 148 and the subsequent proceedings were quashed. The court allowed the writ petition, leaving the parties to bear their respective costs.

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