2021 (4) TMI 537 - AT - Income Tax

Validity of reopening of the assessment by issuing notice u/s 148 read with section 147 - eligible reason to believe escapement of income - bogus LTCG/STCL and unsecured loans receipts - A.O noted that the assessee company has no real business activities since there are no purchase and sales found during the relevant F.Y - whether the AO on the basis of whatever material before him, which he had indicated in his reasons recorded had reasons warrant holding a belief that income chargeable to tax has escaped assessment? - whether the condition precedent necessary to usurp the re-opening jurisdiction can be discerned from perusal of the reasons recorded by the AO in the instant case? - HELD THAT - As in the reasons recorded had specifically stated that the assessee had received ₹ 25,00,000/- from M/s. DRS Enterprises Pvt. Ltd. and M/s. Hanuman Traders Pvt. Ltd. which according to him was nothing but the unaccounted money of the assessee company which prompted him to believe that there is escapement of income, and therefore, he resorted to reopening u/s 147 of the Act by issuing notice u/s 148 of the Act. So it should be noted that this was the factual basis/foundation based on information from Investigation Wing, which was the basis and reason for him to form a belief that income of assessee which is chargeable to tax has escaped assessment. However, when the assessee brought to the notice of the A.O that the assessee company did not receive ₹ 25,00,000/- from M/s. DRS Enterprises Pvt. Ltd. and M/s. Hanuman Traders Pvt. Ltd., the A.O finds that the assessee company has received money from M/s Radharani Vyapaar (P) Ltd. According to the A.O, M/s Radharani Vyapaar (P) Ltd. has received the money directly from M/s Kokila Trading Co. and M/s Kokila Trading Co. has received money from M/s. DRS Enterprise. Thus, it is noted that the factual foundation on which the AO based his reason for reopening does not exist. Information adverse may trigger reason to suspect and not reason to believe . So the AO should have conducted reasonable enquiry and collected material which could make him believe, that in fact there is escapement of income, which in this case AO did not do, so the reopening based on the reasons recorded by him to re-open is bad in law. Reasons are required to be read as they were recorded by the A.O. No substitution or deletion is permissible. No addition can be made to those reasons. No inference can be allowed to be drawn on the basis of reasons not recorded by the A.O. He has to speak through the reasons . Their lordships added that the reasons shall be self-explanatory and should not keep the assessee guessing for reasons. Reasons provide link between conclusion and evidence Therefore, reasons are to be examined only on the basis of reasons as recorded. Here, in this case, note that the A.O on mistaken facts resorted to reopening which is an admitted fact on a perusal of re-assessment order. Therefore, the condition precedent for reopening the assessment u/s 147 of the Act is found to be absent and, therefore, the reopening itself is bad in law - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening the assessment under Section 148 read with Section 147 of the Income Tax Act, 1961.
2. Factual correctness of the reasons for reopening the assessment.
3. Jurisdictional validity of the Assessing Officer's (AO) action based on the reasons recorded.

Detailed Analysis:

Validity of Reopening the Assessment:
The primary issue raised by the assessee was the validity of reopening the assessment by issuing notice under Section 148 read with Section 147 of the Income Tax Act, 1961. The assessee contended that the reasons for reopening the assessment were factually incorrect, and thus, the reopening was invalid. The AO reopened the assessment based on information received from the ADIT (Inv.), Unit-4(2), Kolkata, regarding cash deposits in the accounts of M/s. DRS Enterprises Pvt. Ltd. and M/s. Hanuman Traders Pvt. Ltd., which were alleged to be shell companies providing accommodation entries.

Factual Correctness of the Reasons for Reopening the Assessment:
The AO received information that the assessee company received ?25,00,000 from the two shell companies. However, the assessee filed an affidavit stating that it had not received any funds from these companies. The AO later found that the funds were transferred through multiple layers involving other entities, ultimately reaching the assessee. The initial reason for reopening, based on the direct receipt of funds from the two shell companies, was factually incorrect.

Jurisdictional Validity of the AO's Action:
The AO's jurisdiction to reopen the assessment hinges on the "reason to believe" that income chargeable to tax has escaped assessment. The Tribunal emphasized that the reasons recorded by the AO must be evaluated on a standalone basis without any addition or extrapolation. The AO's reasons must be based on information and belief grounded in reason. The Tribunal noted that the AO's initial reason for reopening was based on incorrect facts, and the subsequent findings did not align with the original reasons recorded. Therefore, the reopening was not based on a valid "reason to believe" but rather on "reason to suspect," which necessitated further inquiry before reopening.

Conclusion:
The Tribunal concluded that the AO's reopening of the assessment was based on erroneous facts and did not satisfy the condition precedent of "reason to believe" as required under Section 147 of the Act. The reopening was thus deemed invalid. Consequently, the notice under Section 148 and the subsequent addition of ?9,80,494 were quashed. The appeal of the assessee was allowed.

Order Pronouncement:
The order was pronounced in the open court on 9th April 2021, allowing the appeal of the assessee.