2022 (10) TMI 765 - AT - Income Tax

Reopening of assessment us 147 - Eligible reasons to believe - Whether reopening proceedings on the ground that from the reasons it is not discernible as to whether the AO has applied his mind to the information and independently arrived at a belief that income has escaped assessment? - HELD THAT - Reasons referred to must disclose process of reasoning by which the Assessing Officer holds reason to believe. There must be nexus between such material and belief. Further and most importantly the reasons referred to must show application of mind by the AO. It is also a settled law that the validity of the initiation of the reassessment proceeding is to be judged with reference to the material available with the AO at the point of time of the issue of notice under section 148. In the present case, as is evident from the assessment order, the Assessing Officer was having nothing except the list provided by the CIT, Central-2, New Delhi about the list of accommodation entries. Beyond that he was not having the copies of the statement of any of these persons. He was not having copy of the assessment orders and other details or document which would have enabled the Assessing Officer to apply his mind and form a belief that income has escaped assessment. In fact this information was not with the Assessing Officer till fag end of the reassessment proceedings, a fact admitted by the Assessing Officer himself in the assessment order. In the case of Sarthak Securities Pvt. Ltd. 2010 (10) TMI 92 - DELHI HIGH COURT the Hon ble jurisdictional High Court has held that under the circumstances narrated hereinabove the reopening cannot be said to be a valid reopening. Thus reopening of the assessment is without application of mind and examination of the facts and accordingly the reopening is held to be invalid and accordingly the same is quashed - Decided in favour of assessee.

Issues Involved:
1. Reopening of assessment under Section 147 of the Income Tax Act.
2. Treatment of purchases as bogus and addition to income.
3. Denial of opportunity to cross-examine a witness.
4. Denial of opportunity to review books of accounts.
5. Admission of actual sales by witnesses.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 147 of the Income Tax Act:
The primary issue was whether the Assessing Officer (AO) was justified in reopening the assessment under Section 147. The Tribunal found that the AO had not applied his mind independently and relied solely on information provided by the CIT, Central-2, New Delhi, regarding accommodation entries. The AO issued a notice under Section 148 based on this information without verifying the details or the nature of transactions. The Tribunal cited the Supreme Court's interpretation in Sheo Nath Singh, emphasizing that "reason to believe" must be based on reasonable grounds and not mere suspicion. The Tribunal referenced similar cases, such as Unique Metal Industries and Radhey Shyam and Company, where assessments were quashed due to non-application of mind by the AO. Consequently, the Tribunal held that the reopening of the assessment was invalid and quashed the assessment order.

2. Treatment of Purchases as Bogus and Addition to Income:
The AO treated purchases worth Rs. 21,00,498/- from three entities as bogus and added this amount to the assessee's income under Section 69C. The Tribunal noted that the AO's decision was influenced by information regarding accommodation entries provided by certain individuals. However, the Tribunal found that the AO did not have sufficient material or independent verification to substantiate that the purchases were indeed bogus. The Tribunal referenced previous cases where similar additions were deleted due to lack of evidence and non-application of mind by the AO. Therefore, the Tribunal quashed the addition made by the AO.

3. Denial of Opportunity to Cross-Examine a Witness:
The assessee contended that the AO erred by not providing an opportunity to cross-examine Shri Vishesh Gupta, whose statement was used against the assessee. The Tribunal did not delve deeply into this issue as it had already quashed the assessment on the grounds of invalid reopening. However, it implicitly acknowledged the procedural lapse by the AO in not allowing the cross-examination, which could have further weakened the AO's case.

4. Denial of Opportunity to Review Books of Accounts:
The assessee argued that the AO did not provide an opportunity to review the books of accounts. Similar to the cross-examination issue, the Tribunal did not address this in detail since the assessment was quashed on jurisdictional grounds. Nonetheless, the denial of this opportunity highlighted procedural deficiencies in the AO's approach.

5. Admission of Actual Sales by Witnesses:
The assessee pointed out that the witnesses, Shri Rakesh Gupta and Shri Vishesh Gupta, admitted to making actual sales constituting 10% of their total sales. The Tribunal noted this admission but focused more on the AO's failure to independently verify the information and apply his mind. The Tribunal's decision to quash the assessment was primarily based on the invalid reopening and non-application of mind, rather than the specifics of the witnesses' admissions.

Conclusion:
The Tribunal quashed the assessment order under Section 143(3) read with Section 147, holding that the AO had wrongfully assumed jurisdiction without proper application of mind. Consequently, the appeal by the assessee was allowed. The Tribunal did not find it necessary to delve into the merits of the case further, given the fundamental flaw in the reopening of the assessment.

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