2023 (2) TMI 426 - HC - Income Tax

Reopening of assessmnet u/s 147 - reason to believe OR reason to suspect - transaction made by the assessee with M/s Magnum Tradex Pvt. Ltd, which is a shell company foated for the purpose of providing accommodation entries - HELD THAT - In the reasoning recorded, it is not clear as to how M/s Magnum Tradex Pvt. Ltd. is sought to be connected with Rajeev Khushwaha. It has not been alleged in the reasons that M/s Magnum Tradex Pvt. Ltd., with whom the Petitioner made an alleged sale was being run by Rajeev Khushwaha, although, in the reply affidavit, it is stated by the revenue that M/s Magnum Tradex Pvt Ltd, was one of the entities which was foated by Rajeev Khushwaha for the purpose of providing accommodation entries. It is settled law that the issue of reopening of assessment has to be tested only on the basis of the reasons recorded, which reasons can neither be improved upon nor substituted by an affidavit or oral submissions (See First Source Solution Ltd case 2021 (9) TMI 248 - BOMBAY HIGH COURT Therefore, the action of the assessing Officer for the purpose of reopening of reassessment has to be tested on the basis of reasons recorded by the said Officer and cannot, therefore, be improved upon the reply affidavit. Reasons also do not furnish any explanation as to on what basis and material the assessing Officer came to a conclusion that M/s Magnum Tradex Pvt. Ltd., was indeed a shell entity. The verification of the VAT returns referred to in the reasons recorded suggest only transaction between the Petitioner and M/s Magnum Tradex Pvt. Ltd., in regard to goods sold - There was, thus, no material or basis for the assessing Officer to hold the transaction between the Petitioner and M/s Magnum Tradex Pvt. Ltd., as not a genuine transaction of sale or for that reason to hold that M/s Magnum Tradex Pvt. Ltd. was a shell entity. Reasons recorded do not suggest at all whether pursuant to receipt of information, the assessing Officer had independently applied its mind to the information received or conducted its own inquiry into the matter for the purpose of coming to a conclusion that indeed income assessable to tax had escaped assessment or that the transaction in question with the alleged shell entity was only a paper transaction. - Decided in favour of assessee.

Summary

Issues:
Reopening of assessment based on escaped income chargeable to tax for the assessment year 2016-17 due to alleged transactions with shell entities. Jurisdictional requirement of Section 147 under the Income Tax Act, 1961.

Analysis:

Issue 1 - Reopening of Assessment:
The assessing Officer sought to reopen the assessment for the assessment year 2016-17 based on information received regarding a search operation involving demonetized currency. The reasons provided indicated a connection between the Petitioner and a shell entity, M/s Magnum Tradex Pvt. Ltd. The Petitioner challenged the reopening, arguing that the reasons were vague and lacked a direct nexus to establish escaped income chargeable to tax. The Supreme Court precedent in ITO Vs. Lakhmani Mewal Das emphasized the requirement of a rational connection between the material and the belief of income escapement. The Court evaluated the provided reasons, highlighting the lack of clarity on how the shell entity was linked to the alleged accomplice, Rajeev Khushwaha. It was concluded that the assessing Officer failed to establish a valid basis for the reassessment, as the reasons did not demonstrate an independent inquiry or sufficient material to support the claim of income escapement.

Issue 2 - Jurisdictional Requirement under Section 147:
Section 147 of the Income Tax Act empowers the assessing Officer to reassess income if there is a "reason to believe" that income has escaped assessment. The Court reiterated that the reasons recorded for reopening assessments are crucial and cannot be substituted by affidavits or oral submissions. In this case, the Court found that the assessing Officer did not meet the conditions precedent under Section 147, as the reasons lacked clarity on the nature of the transactions with the alleged shell entity and failed to demonstrate independent verification or inquiry. Consequently, the Court allowed the Petition, quashed the notice issued under Section 148, and set aside the Order disposing of objections to the reopening of assessment.

In summary, the High Court of Bombay held that the assessing Officer's notice to reopen the assessment for the assessment year 2016-17 was without jurisdiction as it failed to establish a direct nexus between the provided reasons and the belief of income escapement. The Court emphasized the importance of fulfilling the statutory requirements under Section 147 and concluded that the reasons recorded did not meet the necessary criteria for reassessment, ultimately ruling in favor of the Petitioner by quashing the notice and setting aside the Order disposing of objections.