2022 (12) TMI 1529 - AT - Income Tax

Reopening of assessment u/s 147 - Reasons to believe or Reason to suspect - AO was of the opinion that assessee might have purchased goods from the Grey Market - profit embedded in the turnover taxed at the rate of 12.5% - HELD THAT - The information on the basis of which the AO formed the opinion of escapement of income to the tune of Rs.3,00,52,199 i.e. bogus sales was not correct and instead, AO after investigation has accepted the purchases as well as sales of goods shown by the assessee in the assessee s book. In the light of this crucial fact, it is discerned that AO s reasons recorded for reopening the assessment was based on information from the Investigation Wing, which can at best be termed as Reason to suspect and not Reasons to believe. When there was adverse information, AO ought to have made preliminary enquiries and collected material which could make him form belief that there is in fact escapement of income, which in the facts discussed the AO failed to do. Therefore, we hold that the jurisdictional requirement that is Reason to believe, escapement of income as occurring in section 147 of the Act has not been met by the AO in the reasons recorded in the instant facts of the case. Therefore, we are inclined to quash the notice issued u/s 148 of the Act itself. Appeal of the assessee is allowed.

Summary

Issues:
1. Validity of reopening of assessment u/s 147
2. Admissibility of reassessment order u/s 148
3. Treatment of impugned purchases as bogus
4. Acceptance of retracted statement of third party
5. Addition based on lack of quantitative stock details
6. Addition based on notional income and brokerage expenses

Validity of Reopening of Assessment u/s 147:
The appeal pertains to the validity of the reopening of assessment u/s 147 for the assessment year 2007-08. The Assessing Officer (AO) reopened the assessment based on information received regarding accommodation entries from an entry operator. The AO concluded that the assessee might have procured goods from the Grey Market using bogus bills. The AO made an ad hoc addition to the income. The Tribunal reviewed the reasons recorded by the AO for reopening the assessment, which highlighted the alleged escapement of income. The Tribunal noted that the AO's reasons were based on information from the Investigation Wing and were more akin to 'reason to suspect' rather than 'reason to believe.' As the AO failed to conduct preliminary inquiries to establish escapement of income, the Tribunal held that the jurisdictional requirement for reopening was not met, leading to the quashing of the notice issued u/s 148.

Admissibility of Reassessment Order u/s 148:
The Tribunal examined the reassessment order made pursuant to the reopening of assessment u/s 147. The AO had accepted the purchases and sales shown by the assessee in the books, contradicting the initial suspicion of bogus sales. Consequently, the Tribunal found that the reassessment order was null in the eyes of the law due to the failure to meet the jurisdictional requirement of 'reason to believe, escapement of income.'

Treatment of Impugned Purchases as Bogus:
The assessee challenged the CIT(A)'s decision to treat the impugned purchases as bogus. The AO had made additions based on the belief that the purchases were from the Grey Market with accommodation bills. However, subsequent investigation revealed that the purchases and sales were genuine, leading to the conclusion that the initial suspicion was unfounded. The Tribunal held that the CIT(A) erred in upholding the addition based on incorrect premises.

Acceptance of Retracted Statement of Third Party:
The CIT(A) upheld the addition based on a retracted statement of a third party. However, the Tribunal found that the reassessment order was null and void, rendering the acceptance of the retracted statement irrelevant.

Addition Based on Lack of Quantitative Stock Details and Notional Income/Brokerage Expenses:
The CIT(A) upheld additions made by the AO due to the lack of quantitative stock details and comparison with notional income and brokerage expenses. However, the Tribunal's decision to quash the reassessment order rendered these additions invalid, leading to the allowance of the assessee's appeal.

In conclusion, the Tribunal allowed the assessee's appeal, quashing the notice issued u/s 148 and declaring the reassessment order null and void due to the failure to meet the jurisdictional requirement for reopening the assessment.