2021 (3) TMI 900 - HC - Income Tax

Reopening of assessment u/s 147 - assessee has received shareholders' funds from the Kolkata based shell companies - proof of proper application of mind in according sanction under Section 151 of the Act for the purpose of issue of notice under Section 148 - whether the notice of re-opening issued under Section 148 of the Act should be quashed and set-aside? - HELD THAT - The return filed by the assessee was accepted without scrutiny. Since there was no scrutiny assessment, AO had no occasion to form any opinion on any of the issues arising out of the return filed by assessee. The concept of change of opinion would, therefore, have no application. It is equally well settled that at the stage of reopening of the assessment, the court would not minutely examine the possible additions which the AO wishes to make. The scrutiny at that stage would be limited to examine whether the AO had formed a valid belief, on the basis of the materials available with him, that the income chargeable to tax had escaped assessment. AO has considered the materials on record which would, prima facie, suggest that during the year under consideration there was a huge hike in the amount of the share capital and share premium of the assessee company. The assessee received the amount of share capital and share premium from the Kolkata based shell companies, namely, Prime Vyapaar Pvt. Ltd. and Asha Apartments Pvt. Ltd. respectively. The Assessing Officer, prima facie found, based on the materials on record and the information received, that total share capital of ₹ 40 lakh was received during the year under consideration. On verification of the details of the investors companies, it was found, prima facie, that the same was controlled by one Kolkata based accommodation entry provider, namely Manoharlal Nangalia. In a statement recorded by the department, Manoharlal Nangalia is said to have admitted to the fact that his main business is to provide accommodation entries through shell companies to various beneficiaries in lieu of commission. For mere verification or for a fishing inquiry re-opening of the assessment is not permissible. However, such is not the case on hand. It cannot be said to be a fishing inquiry. There is some tangible material as on date in the hands of the Assessing Officer, and the Assessing Officer, after due application of mind, has recorded a satisfaction of his own that the income has escaped the assessment. It is not a case of mere change of opinion or drawing of a different inference from the same facts as were earlier available but acting on fresh information. Since the belief is that of the Income Tax Officer, the sufficiency of reasons for forming the belief is not for the Court to judge but it is open to an assessee to establish that there, in fact, existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and non-specific information. To that limited extent, the Court may look the conclusion arrived at by the Income Tax Officer and examine whether there was any material available on the record from which the requisite belief could be formed by him and further whether that material had any rational connection or a live link with the formation of the requisite belief. - Decided against assessee.

Issues Involved:
1. Legality of the notice for re-opening assessment under Section 148 of the Income Tax Act, 1961.
2. Validity of the reasons provided by the Assessing Officer for re-opening the assessment.
3. Allegations of borrowed satisfaction and lack of independent verification by the Assessing Officer.
4. Whether the re-opening was based on a valid belief or mere suspicion.
5. The role of the sanctioning authority under Section 151 of the Income Tax Act.
6. Legitimacy of the final assessment order passed under Section 143(3) r.w.s. 147 of the Income Tax Act.

Detailed Analysis:

1. Legality of the Notice for Re-opening Assessment:
The court examined whether the notice issued under Section 148 of the Income Tax Act for re-opening the assessment was lawful. The writ-application challenged the notice on the grounds that it was based on incorrect facts and lacked proper justification. The court noted that the return filed by the assessee was accepted without scrutiny, and therefore, the concept of change of opinion did not apply. The court emphasized that at the stage of re-opening, the scrutiny is limited to examining whether the Assessing Officer had a valid belief that income chargeable to tax had escaped assessment.

2. Validity of the Reasons Provided by the Assessing Officer:
The reasons for re-opening the assessment included a significant increase in share capital and premium from Kolkata-based shell companies. The Assessing Officer cited information from various search and seizure operations indicating that the companies involved were shell companies providing accommodation entries. The court found that the Assessing Officer had considered materials suggesting that the assessee received funds from shell companies controlled by an entry provider, Manoharlal Nangalia. The court held that the Assessing Officer had a valid reason to believe that income had escaped assessment.

3. Allegations of Borrowed Satisfaction and Lack of Independent Verification:
The writ-applicant argued that the Assessing Officer relied on borrowed satisfaction from other authorities without independent verification. The court observed that the Assessing Officer had applied his mind to the materials and information received, which included statements and reports from investigations. The court rejected the argument of borrowed satisfaction, stating that the Assessing Officer had formed his own belief based on tangible material.

4. Whether the Re-opening was Based on a Valid Belief or Mere Suspicion:
The court emphasized that for re-opening an assessment, the Assessing Officer must have a reason to believe that income had escaped assessment, not merely a suspicion. The court found that the Assessing Officer's belief was based on specific and reliable information regarding the receipt of funds from shell companies. The court concluded that the re-opening was not a fishing inquiry but was based on valid and tangible material.

5. The Role of the Sanctioning Authority under Section 151 of the Income Tax Act:
The writ-applicant contended that the sanctioning authority had recorded a mechanical satisfaction without proper application of mind. The court referred to the Revenue's affidavit, which addressed this issue, and found no merit in the argument. The court held that the sanctioning authority had duly considered the materials before granting approval for re-opening the assessment.

6. Legitimacy of the Final Assessment Order:
The court noted that the final assessment order under Section 143(3) r.w.s. 147 was passed after the initial notice for re-opening. The court allowed the writ-applicant to challenge the final assessment order by filing an appeal before the CIT(A). The court clarified that it had not examined the merits of the final assessment order and that the appellate authority should decide the appeal independently.

Conclusion:
The court dismissed the writ-application, upholding the legality of the notice for re-opening the assessment. The court found that the Assessing Officer had valid reasons to believe that income had escaped assessment and that the re-opening was based on tangible material. The court allowed the writ-applicant to challenge the final assessment order through an appeal, ensuring that the appellate authority would decide the matter on its own merits. The ad-interim relief granted earlier was vacated.

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