2022 (2) TMI 766 - AT - Income Tax

Reopening of assessment u/s 147 - Addition u/s 68 - Non independent application of mind by AO - reasons contained in the report of enquiries made by DGIT (Inv.), Mumbai, about accommodation entries given by entry operators - HELD THAT - AO has not stated in the reason that he has gone through the reports of the Investigation Wing. A.O. merely repeated the report of the Investigation Wing in the reasons and formed his belief that income chargeable to tax has escaped assessment, without arriving at his satisfaction. The reasons to believe contain no reason, but, conclusion of the A.O. without any basis - no independent application of mind by the A.O. to the report of the Investigation Wing which formed the basis for reasons to believe that income chargeable to tax has escaped assessment. The conclusion of the A.O. in the reasons is at the best reproduction of conclusion of the Investigation Report - A.O. has not brought anything on record on the basis of which any nexus could have been established between the material and the escapement of income. The reasons fail to demonstrate the link between the alleged tangible material and formation of the reason to believe that income has escaped assessment. There is a total non-application of mind on the part of the A.O. while recording the reasons for reopening of the assessment. The conclusion was merely based on observations and information received from DGIT (Inv.), Mumbai, which is not brought on record. Since, there is a total lack of mind while recording the reasons for reopening of the assessment; therefore, assumption of jurisdiction under section 147/148 of the I.T. Act, 1961, is bad in law. Addition u/s 68 - Assessee has taken unsecured loans from the various parties mentioned above through bank and the same was settled by the assessee within the same assessment year or subsequent assessment year again through the bank only. Assessee has filed before tax authorities, the confirmation of all the parties, ledger copy in the books of parties and bank statement of assessee as well as lender parties. These documents indicate that assessee has received loans from the lenders and settled the same before end of the year or subsequent year. AO has only considered the accounting entry in the books of accounts and considered the same as accommodation entry without considering the receipt of payment through bank and settlement of the loan by the assessee through bank. Just because these companies are controlled by Shri Praveen Kumar Jain, all the transactions cannot be termed as accommodation entry unless it is proved. By taking loan and repaying the same through bank, what is the benefit assessee would have got, the tax authorities failed to appreciate that the salient features of accommodation entries are, they remain in the books of account and will be carried forward to several years. In this case, that is not the case, the assessee had settled the unsecured loans within the same year or in subsequent year. Assessing Officer has made addition only relying on the report from DGIT(Inv), Mumbai. - Decided in favour of assessee.

Summary

Issues:
Reopening of assessment based on information from DGIT(Inv), Mumbai
Addition of unsecured loans under section 68 of the Income Tax Act
Validity of reasons for reopening the assessment
Genuineness of loan transactions
Violation of principles of natural justice
Addition of interest on borrowed fund
Jurisdiction under section 147/148 of the I.T. Act

Reopening of assessment based on information from DGIT(Inv), Mumbai:
The appeal was filed against the order of the Learned Commissioner of Income Tax (Appeals) for the assessment year 2012-13. The Assessing Officer reopened the assessment based on information from DGIT(Inv), Mumbai regarding beneficiaries of accommodation entries of bogus unsecured loans. The AO observed unsecured loans received by the assessee from parties controlled by Shri Praveen Kumar Jain. The AO was not convinced by the submissions of the assessee and proceeded to make additions under section 68 of the Act. The Ld. CIT(A) upheld the addition based on the AO's findings and the report from DGIT(Inv) related to Shri Praveen Kumar Jain.

Addition of unsecured loans under section 68 of the Income Tax Act:
The assessee challenged the addition of unsecured loans under section 68 of the Income Tax Act. The grounds of appeal included contentions that the loans were genuine, with evidence supporting the transactions through banks. The AR argued that the AO did not establish a nexus between the material and the alleged escapement of income. The AR relied on various decisions to support the contention that the reopening of the assessment was illegal and lacked jurisdiction. The Tribunal found that the AO did not apply his mind independently and concluded that the reopening of the assessment was bad in law.

Validity of reasons for reopening the assessment:
The Tribunal determined that the AO's reasons for reopening the assessment lacked independent application of mind. The reasons were based on observations and information from DGIT(Inv), Mumbai, without demonstrating a link between the material and the escapement of income. The Tribunal held that the assumption of jurisdiction under section 147/148 of the I.T. Act, 1961, was not justified and that the reopening of the assessment was bad in law.

Genuineness of loan transactions:
The Tribunal analyzed the genuineness of the loan transactions and found that the assessee had taken unsecured loans from various parties, repaid them through banks, and provided supporting documents to tax authorities. Despite the transactions involving concerns controlled by Shri Praveen Kumar Jain, the Tribunal noted that the loans were settled within the same or subsequent assessment year through banks. The Tribunal emphasized that the AO's addition was solely based on the report from DGIT(Inv), Mumbai, without considering the bank transactions and settlements by the assessee.

Violation of principles of natural justice:
The Tribunal considered the violation of principles of natural justice, highlighting the necessity for the AO to confront the assessee with any material collected and offer an opportunity for cross-examination in case of third-party statements. The Tribunal concluded that the AO's failure to establish a nexus between the material and the escapement of income rendered the reopening of the assessment illegal.

Addition of interest on borrowed fund:
The Tribunal addressed the addition of interest on borrowed funds, which the AR argued was considered as unexplained cash credit under section 68. The Tribunal found merit in the AR's contentions regarding the unsecured loan transactions and allowed the grounds raised by the assessee.

Jurisdiction under section 147/148 of the I.T. Act:
The Tribunal ultimately allowed the appeal filed by the assessee, holding that the reopening of the assessment was bad in law and that the assessee had merit in the unsecured loan transactions. The Tribunal emphasized the lack of independent application of mind by the AO and the reliance on the report from DGIT(Inv), Mumbai without proper consideration of the bank transactions and settlements made by the assessee.