2022 (7) TMI 1536 - HC - Income Tax

Validity of reopening of assessment - notice after a period of four years from the end of the relevant assessment year - agricultural income which included the long term capital gain arising out of the land in question as unexplained - seized material as collected during the course of search action carried out in the case of third party - HELD THAT - As certain incriminating documentary evidence was found and based upon one such document seized during course of search, assessment is sought to be reopened on the ground that the petitioner along with others sold the property for a consideration of Rs. 1,30,80,100/- whereas amount shown in the sale deed is only 1,46,33,000/-. It is also the case of the AO that no return of income was filed by the petitioner at the relevant time and the assessed income to the tune of Rs. 3,27,20,025/- has escaped assessment on account of unexplained long term capital gain. AO has without verification of the record has issued the impugned notice as the petitioner has filed the return of income for the AY 2011-2012 on 17.01.2012 declaring total income of Rs.4,81,499/- which has been processed under section 143(1) of the Act. Thus the entire premise for reopening of the assessment that the petitioner has failed to disclose the long term capital gain by filing return of income is without any basis. Even while disposing the objection of the assessee, the AO failed to consider that the return of income was filed by the assessee on 17.01.2012 declaring long term capital gain with regard to the sale of the land. Moreover, reliance placed by AO on the document seized during the course of search from M/s. K Star Corporation is not at all related to assessee as explained in letter dated 29.11.2018 addressed by the assessee to the AO categorically stating that M/s. K Star Corporation is an unknown entity for the assessee and assessee has not executed any agreement or made any transaction with the said firm and the assessee has executed the sale deed along with other co-owners with Shri Swintobhai Mawani and Ankitbhai Koshiya. Thus the AO has failed to establish any live nexus between the material relied upon to reopen the assessment and as such reopening on the basis of such information is not valid in the eyes of law and liable to be quashed for the reason that the AO failed to apply his mind by arriving at reasonable belief by recording reasons on the borrowed satisfaction. This Court incase of other co-owner Kantibhai Dharmasinh Narola quashed the reopening proceedings and therefore, on the same reasoning the impugned notice is liable to be quashed and set aside. The impugned notice u/s 148 of the Act by the respondent exercising the powers to reopen the assessment is quashed and set aside. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Justification for reopening the assessment based on information from a third-party search.
3. Adequacy of the reasons recorded for reopening the assessment.
4. Application of mind by the Assessing Officer (AO) in forming the belief that income has escaped assessment.
5. Allegation of unaccounted cash receipts and its impact on the assessment.
6. Compliance with procedural requirements for reopening.

Detailed Analysis:

1. Validity of the Notice Issued under Section 148:
The petitioner challenged the notice dated 28.03.2018 issued under Section 148 of the Income Tax Act, 1961, proposing to reopen the assessment for the Assessment Year 2011-2012. The petitioner argued that the initial premise for reopening was erroneous since the petitioner had already disclosed the details of agricultural income, including the long-term capital gain arising from the sale of the land in question. The court noted that the reopening of assessment under Section 147 is a potent power and should not be lightly exercised. The AO must independently arrive at a subjective satisfaction based on objective criteria.

2. Justification for Reopening Based on Third-Party Search:
The reopening was based on information received from a search conducted in the case of M/s. K Star Corporation, which indicated that the petitioner sold land for Rs. 13,08,80,100/- as against the sale deed amount of Rs. 1,46,33,000/-. The petitioner contended that M/s. K Star Corporation was an unknown entity and that the land was sold to Ankitbhai Koshiya and Swintubhai Mavani. The court emphasized that the AO must demonstrate a link between the tangible material and the formation of belief that income has escaped assessment. The reliance on third-party information without independent verification was deemed insufficient.

3. Adequacy of Reasons Recorded for Reopening:
The reasons recorded by the AO for reopening included the assertion that the petitioner had not filed a return of income for the year under consideration, which was factually incorrect. The petitioner had filed a return on 17.01.2012, declaring total income, including long-term capital gain. The court held that the reasons must be self-evident and speak for themselves, and the AO must demonstrate some link between the tangible material and the formation of belief. The court found that the reasons recorded were based on borrowed satisfaction and lacked independent application of mind.

4. Application of Mind by the AO:
The court stressed that the AO, being a quasi-judicial authority, is expected to arrive at a subjective satisfaction independently on an objective criterion. The AO must not merely repeat the report of the investigation but should demonstrate a link between the tangible material and the formation of belief. The court found that the AO failed to establish any live nexus between the material relied upon and the reopening of the assessment. The reopening was based on borrowed satisfaction, which is not tenable in law.

5. Allegation of Unaccounted Cash Receipts:
The AO alleged that the petitioner received unaccounted cash of Rs. 3,27,20,025/- as long-term capital gain, based on the seized documents from M/s. K Star Corporation. The petitioner clarified that no cash was received over and above the sale consideration mentioned in the sale deed. The court noted that the seized material did not substantiate the receipt of unaccounted cash and that the AO's belief was based on assumptions without any tangible evidence. The court held that the AO's belief must be rational and based on a reasonable analysis of the facts.

6. Compliance with Procedural Requirements:
The court examined whether the procedural requirements for reopening were followed, including obtaining necessary sanctions from the competent authority. The court noted that the reopening was based on incorrect premises and lacked independent application of mind by the AO. The court reiterated that the legality of the proceedings initiated under Section 147 must be judged based on the reasons recorded for reopening, and any defects or contradictions in the reasons cannot be improved by adding something more later.

Conclusion:
The court quashed the impugned notice dated 28.03.2018 issued under Section 148 of the Income Tax Act, 1961, as well as the order dated 24.11.2018 disposing of the objections against reopening. The court held that the reopening of the assessment was based on borrowed satisfaction, lacked independent application of mind, and was not justified in law. The petition was allowed, and the rule was made absolute to the extent mentioned.