2021 (2) TMI 1385 - AT - Income Tax

Reopening of assessment u/s 147 - reason to believe - importance of reasons and recording of reasons u/s 147 - HELD THAT - The importance and relevancy of the material to the information was discussed in the case of CIT vs. SFIL Stock Broking Ltd 2010 (4) TMI 102 - DELHI HIGH COURT wherein it was held that mere information is not a material and that even existence of material would not be sufficient to invoke reopening proceedings u/s 147. AO must possess the materials on the basis of which the Investigation Wing of the Department had passed on the information to the AO about escapement of income. Recently in the case of Sabh Infrastructure Ltd 2017 (9) TMI 1589 - DELHI HIGH COURT had even held that AO is bound to supply the materials (not only the reasons ) and in the event of failure to do so will make the reassessment proceedings invalid In the present case the belief of AO is based on the investigation wings observation and not his own, which is sine-qua-non for usurpation of jurisdiction to re-open as held by the Hon ble Supreme Court in Lakhmani Mewal Das 1976 (3) TMI 1 - SUPREME COURT . The information given by the investigation wing at best can trigger reason to suspect and not reason to belief which is the requirement of law for re-opening u/s 147 of the Act. In such a case i.e. reason to suspect, then AO is bound to conduct preliminary inquiry and collected some material which would make him believe that there is in fact an escapement of income. Unfortunately from a reading of the reason s recorded (supra) does not reveal as to what investigation he under took when he got the information from the investigation wing. viz what inquiry was conducted, on whom such inquiry was conducted, what were the evidences or material or admission found in such inquiries and how that material was linked with the case of the assessee. In absence of all such facts being mentioned in the reasons, the reasons-recorded by the AO do not provide any link between the information from DDIT(Inv) and reason warrant holding escapement of income chargeable to tax. Since this link is missing, the reasons recorded does not satisfy the jurisdictional condition precedent in terms of section 147. There is factual errors in the reasons recorded by the AO (supra). According to Ld. A.R in the reasons recorded it is stated that the assessee had made profit in NMCE through one broker i.e. M/s PKC Commodities Ltd for a sum of Rs. 6,03,140. This is not factually correct. Firstly, from M/s PKC Commodities, the assessee earned Rs. 23,89,890. Secondly, the assessee had used service form other two brokers in NMCE trading it made commodity profit of Rs. 20,01,112 through broker M/s AN Commodity Broking (P) Ltd also a loss of Rs. 1,85,568 through broker M/s Rajeshwari Commodity Sales (P) Ltd The reason recorded is not based on correct information from DDIT(Inv) which were riddled with factual inaccuracies and thus cannot be the material on which the AO could have acted upon unless he had made some enquiries to form the requisite jurisdictional belief of escapement of income. This shows lack of application of mind. In this case the AO on the strength of unverified information as afore-stated has issued notice u/s 148 of the Act without satisfying the jurisdictional condition precedent as required u/s 147 of the Act. Thus, the reason failed to meet the test of law and so the notice issued u/s 148 of the Act is without jurisdiction and so consequently all proceedings undertaken thereafter are null in the eyes of law. Decided in favour of assessee.

Summary

Issues Involved:

1. Jurisdiction of the Assessing Officer (AO) to reopen the assessment under Section 148 of the Income Tax Act, 1961.
2. Validity of reasons recorded by the AO for reopening the assessment.
3. Compliance with procedural requirements under Section 147 and Section 151 of the Income Tax Act, 1961.
4. Factual inaccuracies in the reasons recorded for reopening the assessment.

Issue-wise Detailed Analysis:

1. Jurisdiction of the AO to Reopen the Assessment:
The primary issue was whether the AO had the jurisdiction to reopen the assessment under Section 148 of the Income Tax Act, 1961. The assessee challenged the reopening on the grounds that the notice under Section 148 was without jurisdiction and bad in law. The Tribunal examined the legal provisions under Section 147, which requires the AO to have "reason to believe" that income chargeable to tax has escaped assessment. The Tribunal emphasized the necessity for the AO to independently form this belief rather than relying on borrowed satisfaction from other authorities, such as the Investigation Wing.

2. Validity of Reasons Recorded by the AO:
The Tribunal scrutinized the reasons recorded by the AO for reopening the assessment. It was highlighted that the reasons must have a rational connection with the belief that income has escaped assessment. The Tribunal referred to judicial precedents, including ITO vs. Lakhmani Mewal Das, which stressed that the reasons must be clear, unambiguous, and based on relevant material. The Tribunal found that the AO's reasons were based on generalized information from the Forward Market Commission (FMC) and the Investigation Wing, without specific allegations against the assessee. The reasons lacked direct nexus and failed to demonstrate any independent application of mind by the AO.

3. Compliance with Procedural Requirements:
The Tribunal assessed whether the procedural requirements under Sections 147 and 151 were met. It was noted that more than four years had lapsed since the end of the assessment year, necessitating sanction from the Principal Commissioner of Income Tax (Pr. CIT) for reopening. The Tribunal found that the sanction was mechanical and lacked proper application of mind, rendering the reopening process flawed. The Tribunal also emphasized the requirement for the AO to provide both the "reasons" and the "materials" to the assessee, as mandated by judicial precedents, which was not adhered to in this case.

4. Factual Inaccuracies in the Reasons Recorded:
The Tribunal identified factual inaccuracies in the reasons recorded by the AO. The AO alleged that the assessee booked a profit of Rs. 6,03,140 through bogus entities, which was factually incorrect as per the assessee's records. The Tribunal noted that the AO failed to verify the information received from the Investigation Wing and did not conduct any preliminary inquiry to substantiate the claim of escapement of income. The Tribunal concluded that the reasons recorded were based on incorrect information and lacked the necessary jurisdictional foundation, thereby invalidating the reopening of the assessment.

Conclusion:

The Tribunal held that the reopening of the assessment was without jurisdiction due to the lack of independent application of mind by the AO and reliance on borrowed satisfaction. The reasons recorded were found to be vague, general, and factually inaccurate, failing to meet the legal requirements under Section 147. Consequently, the notice issued under Section 148 and all subsequent proceedings were declared null and void. The appeal of the assessee was allowed, and the merits of the addition made by the AO were rendered academic and not addressed.