2023 (11) TMI 1313 - AT - Income Tax

Validity of reopening of the assessment - basis of information received from DDIT - share capital including share premium received by the assessee, as unexplained income u/s 68 - HELD THAT - AO has reproduced the information passed on by DDIT and simply concluded that there was escapement of income. There is no independent application of mind by the AO. Various defects in the reasons recorded by the AO, which were pointed out by AR, also go to suggest that there was no independent application of mine by the AO. AO has not shown as to how the share capital/premium would constitute income that has escaped assessment. Assessee herein is mentioned as a company controlled by Shri Jagdish Prasad Purohit in the list attached with the sworn statement taken from the above said person, while the allegation of the DDIT is that the assessee herein is one of the beneficiaries of Shri Jagdish Prasad Purohit. Admittedly, both these information contradicts with each other. We notice that the AO has not examined this vital aspect while forming belief that there was escapement of income, which also goes to show that there was complete non-application of mind on the part of the assessing officer. It also shows that the assessing officer has failed to demonstrate link between the material and formation of reasons to believe that income has escaped assessment. We hold that the re-opening of assessment is bad in law. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening of assessment under Section 147 of the Income Tax Act.
2. Addition of share capital and share premium as unexplained income under Section 68 of the Income Tax Act.

Issue-wise Analysis:

1. Validity of Reopening of Assessment:

The primary issue in this case was the validity of the reopening of the assessment for the Assessment Year (A.Y.) 2011-12. The reopening was initiated based on information received from the Deputy Director of Income Tax (Investigation) [DDIT], which alleged that the assessee was a beneficiary of accommodation entries provided by a group of companies controlled by Mr. Jagdish Prasad Purohit.

The assessee contended that the reopening was flawed due to a lack of independent application of mind by the Assessing Officer (AO). It was argued that the AO merely relied on the information provided by the DDIT without conducting any independent enquiry or verifying the facts. The reasons recorded for reopening did not reference the completed assessment under Section 143(3) but instead referred to the processing under Section 143(1), indicating a lack of proper consideration of the prior assessment.

Furthermore, the approval for reopening was alleged to be mechanical, as the Joint Commissioner of Income Tax (JCIT) did not verify the fact that a regular assessment had already been completed. The AO's reasons for reopening did not adequately demonstrate how the share premium constituted income that had escaped assessment.

The Tribunal found merit in the assessee's arguments, highlighting several defects in the AO's reasoning, including the failure to mention the share capital in the reasons for reopening and the contradiction in the information regarding the assessee's role as a beneficiary or a conduit. The Tribunal emphasized that the AO's satisfaction for reopening should be independent and not borrowed from the DDIT's information. The Tribunal relied on precedents from the Bombay High Court and Delhi High Court, which stressed the need for independent application of mind by the AO. Consequently, the Tribunal held that the reopening of the assessment was invalid and quashed the orders of the tax authorities.

2. Addition of Share Capital and Share Premium as Unexplained Income:

Since the Tribunal quashed the reopening of the assessment, it did not proceed to adjudicate on the merits of the addition of Rs. 66.25 crores as unexplained income under Section 68 of the Income Tax Act. The Tribunal's decision to invalidate the reopening rendered the discussion on the substantive addition unnecessary.

Conclusion:

The Tribunal allowed the assessee's appeal, quashing the reopening of the assessment due to the lack of independent application of mind by the AO and mechanical approval by the JCIT. The decision underscored the importance of the AO independently verifying information received from investigative authorities before forming a belief of income escapement. As a result, the substantive issue of addition under Section 68 was not addressed.