2022 (4) TMI 1059 - AT - Income Tax

Reopening of assessment u/s 147 - link between the tangible material and the formation of the reasons to believe that income had escaped assessment - bogus sales which escaped to tax in the hands of the Assessee - HELD THAT - Demonstration of link between the tangible material and the formation of the reasons to believe that income had escaped assessment is necessary for reopening the case u/s 147/ 148 of the Act and the information received from the Investigation Wing cannot be said to be a tangible material per se without further inquiry being undertaken by the AO. The conclusion of the AO, based on the investigation report indeed is a borrowed satisfaction. The Hon‟ble High Court in MEENAKSHI OVERSEAS PVT. LTD. 2017 (5) TMI 1428 - DELHI HIGH COURT also held that it is established principle of law that if a particular authority has been designated to record his/her satisfaction on a particular issue, then it is that authority alone who should apply his/her independent mind to record his/her satisfaction and further mandatory condition is that the satisfaction recorded should be independent and not borrowed or dictated‟ satisfaction Admittedly in this case, the AO while recording reasons for selection of the case, neither made any enquiry qua the information dated 14.03.2017 of the ADIT, Investigation, Faridabad nor made any effort to find out the veracity and authenticity of information and any corroborative evidence/material thereto, but only acted on the information while forming belief qua escapement of the income and initiation of proceedings u/s 147/148 of the Act, without connecting tangible material and the formation of the reasons to believe for escapement of income. The reasons recorded in the instant case are vague and based on un-substantive reasoning, uncorroborated material and lack of evidence and hence as per decisions of the jurisdictional High Court referred above, the reasons referred above tantamount to be based on borrowed satisfaction and according to our considered view, does not sound valid reasons in the eyes of law, for reopening of the case. CIT(A) without appreciating the facts of the case, explanation submitted and evidences places on record judiciously, was absolutely unjustified in upholding the reopening of the assessment u/s 147 of the Act. Consequently the order under challenge whereby the addition made by the AO has been sustained by the Ld. CIT(A) along with the re-assessment order stands quashed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening the case under sections 147/148 of the Income Tax Act, 1961.
2. Sustenance of the addition of ?25 lakhs to the total income of the Assessee.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Case under Sections 147/148:

The appeal was preferred by the Assessee against the order dated 09.11.2018, which upheld the assessment order dated 30-11-2017 under section 147 of the Income Tax Act, 1961. The case was reopened based on information from the ADIT (Investigation), Faridabad, indicating that M/s. Neelkanth Steel, Faridabad had made bogus sales of ?25 lakhs, which escaped tax in the hands of the Assessee.

The Assessee challenged the reopening on the grounds that the AO acted solely on the information received from the ADIT (Investigation) without applying his independent mind. The Assessee cited various judgments, including PCIT Vs. RMG Polyvinyl (I) Ltd and Pr. CIT Vs. Meenakshi Overseas Pvt. Ltd, arguing that the reopening was based on borrowed satisfaction and lacked independent verification.

The Tribunal examined the provisions of Section 147, which allows the AO to reassess income if there is reason to believe that income has escaped assessment. However, the reasons must be bona fide and based on relevant material. The Tribunal found that the reasons recorded by the AO were merely a reproduction of the information from the ADIT (Investigation) and lacked independent verification or inquiry.

Citing judgments from the jurisdictional High Court, the Tribunal emphasized that the reasons to believe must demonstrate a link between tangible material and the formation of the belief that income has escaped assessment. The Tribunal concluded that the AO's reasons were vague, unsubstantiated, and based on borrowed satisfaction, thus invalidating the reopening of the case.

2. Sustenance of the Addition of ?25 Lakhs:

The AO had added ?25 lakhs to the Assessee's total income under sections 69/69C of the Act, based on the alleged bogus sales from M/s. Neelkanth Steel. The Assessee failed to produce documentary evidence to substantiate the genuineness of the transactions.

The Assessee contended that the addition was unjustified and relied on various judgments to support its case. However, since the Tribunal quashed the reopening of the case, it refrained from deciding on the merits of the addition, deeming it a futile exercise.

Conclusion:

The Tribunal allowed the Assessee's appeal, quashing the reassessment order and the order of the CIT(A) that upheld the addition. The Tribunal found that the reopening of the case under sections 147/148 was invalid due to the lack of independent application of mind by the AO and reliance on borrowed satisfaction. Consequently, the Tribunal did not address the merits of the addition of ?25 lakhs. The appeal was pronounced in favor of the Assessee on 23/03/2022.