2023 (3) TMI 265 - AT - Income Tax

Validity of the assessment framed u/s 147 - Suspension v/s reason to believe - nexus between the information in the possession of the AO and formation of belief of escapement of income - reopening made beyond four years - HELD THAT - The income of the assessee during the year alone is not sufficient to draw any conclusion regarding source of investments made during the year. Investments can be made from past earnings /savings also. Merely because income returned for the year was not sufficient to justify investment in LIC premium, it cannot be inferred that the investment was made from undisclosed sources AO appears has proceeded to form his belief of escapement of income in the present case on an implausible premise. His premise that the investments during the year are sourced from the incomes earned during year suffers from a basic fallacy. In fact, this information could not have even lead to suspicion about the income having escaped assessment. AO needed to conduct some more inquiry, determine the quantum of income which the assessee had been returning in the past years, and whether considering his life style and other factors he could have reasonably accumulated the amount to the extent of Rs.10 lakhs for making investment in LIC premium. He ought to have sought explanation from the assessee of the source of investment, and if his inquiries and investigation would have not satisfied him only in such circumstances, AO could have formed belief of escapement of income on account of source investment in LIC premium remaining unexplained. Thus information in the possession of the AO could not have lead to belief of escapement of income so as to assume valid jurisdiction to reopening the case of the assessee u/s 147. CIT(A) has proceeded on the exactly wrong premise as that on which the AO had proceeded that the source of investments is to be co-related or explained through income earned during the year, that is why, CIT(A) has noted that the AO had verified the returned income and the amount of investment and had rightly come to the conclusion that the assessee had no sufficient source of making such investment - since we have held the jurisdiction assumed u/s 147 to be invalid, the assessment order passed, as a consequence is not sustainable in the eyes of law and without jurisdiction. Therefore, the same is directed to be set aside - Assessee appeal allowed.

Summary

Issues:
1. Validity of reopening of assessment under section 147 of the Income Tax Act, 1961.
2. Nexus between information possessed by AO and belief of escapement of income.
3. Sufficiency of information for forming a belief of escapement of income.
4. Jurisdiction assumed under section 147 being invalid.

Analysis:

Issue 1: Validity of Reopening of Assessment under Section 147:
The appeal was filed against the order passed by the Commissioner of Income Tax(Appeals) challenging the validity of the assessment framed under section 147 of the Act for the assessment year 2011-12. The assessee raised grounds questioning the legality of the reopening of assessment, emphasizing that the reasons did not reflect income escaping assessment as required under section 149(1)(b) of the Act.

Issue 2: Nexus between Information and Belief of Escapement of Income:
The primary challenge to the validity of the assessment was based on the lack of nexus between the information possessed by the Assessing Officer (AO) and the belief of income escapement, a necessary prerequisite for reopening under section 147. The information regarding the investment in LIC premium was considered insufficient to form a belief of escapement of income, as it did not establish a clear link between the investment and undisclosed sources.

Issue 3: Sufficiency of Information for Forming a Belief of Escapement of Income:
The information provided to justify the reopening was deemed inadequate by the tribunal. Merely comparing the investment in LIC premium with the income returned by the assessee was not sufficient to conclude that the investment was from undisclosed sources. The tribunal highlighted the need for further inquiry and analysis to establish a valid belief of income escaping assessment, emphasizing that the AO's premise for reopening lacked a logical basis.

Issue 4: Invalid Jurisdiction Assumed under Section 147:
The tribunal concurred with the assessee's argument that the AO's jurisdiction assumed under section 147 was invalid due to insufficient grounds for forming a belief of income escapement. The tribunal set aside the assessment order, ruling it as unsustainable in the eyes of the law and without jurisdiction, leading to the allowance of the assessee's appeal.

In conclusion, the tribunal found the reopening of assessment to be invalid due to the lack of a proper nexus between the information possessed and the belief of income escapement, emphasizing the necessity for sufficient grounds to justify reopening under section 147 of the Act.