2024 (7) TMI 1574 - AT - Income Tax

Validity of reopening of assessment - Addition u/s 68 - unsecured loans claimed by the assessee as unexplained income of the assessee - AO received information from the Investigation Wing that the assessee s proprietorship concern has received funds during the year from three shell companies - HELD THAT - AO did not corelate the said information with the accounts of the assessee. There was no credible information available with the AO to form the belief that the income of the assessee has escaped assessment. It has been held time and again that the reasons to believe regarding the escapement of the income should be based on certain tangible material and it should not be mere pretence of the AO. The reasons to believe does not mean reason to suspect. Reopening of the assessment is not permitted for making fishing and roving enquiries. AO after receipt of alleged information received from the Investigation Wing was supposed to corelate the same with the records and other facts of the case and thereafter should have satisfied himself of escapement of income. Reopening is not permissible on the basis of borrowed satisfaction of the Assessing Officer. Therefore, reopening of the assessment in this case is held as bad in law. Addition u/s 68 - As in the assessment order, AO has merely relied on the report of the Investigation Wing. That the AO has not discussed a single evidence/document furnished by the assessee and has not pointed out any defect or discrepancy in the evidence furnished by the assessee to prove the identity, creditworthiness and genuineness of the transaction. The ld. counsel for the assessee has duly demonstrated from the record that all the creditors had sufficient net worth to give loan to the assessee. counsel has duly demonstrated that the entire loan was repaid during the subsequent assessment years. As noted, the loan duly carried interest, TDS was duly deducted on the interest expenditure, the interest income has been accounted by lender and the same forms part of the income of the lender. Interestingly, the Assessing Officer has not made any disallowance in respect of interest expenditure incurred by the assessee on the aforesaid loan amount. In our view, neither the Assessing Officer nor the ld. CIT(A) has pointed out any defect or discrepancy in the evidences furnished by the assessee - No justification on the part of the lower authorities in making/confirming the impugned addition and the same is accordingly ordered to be deleted. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues presented and considered in this judgment include:

• Whether the reopening of assessments under Section 147 of the Income Tax Act was legally valid.
• Whether the additions made under Section 68 of the Income Tax Act, treating unsecured loans as unexplained income, were justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Reopening of Assessments

• Relevant Legal Framework and Precedents: The reopening of assessments is governed by Section 147 of the Income Tax Act. The legal standard requires that the Assessing Officer must have a "reason to believe" that income has escaped assessment, based on tangible material.
• Court's Interpretation and Reasoning: The tribunal found that the reopening was based on mere suspicion and uncorroborated information from the Investigation Wing. The Assessing Officer failed to correlate the information with the assessee's records, leading to a "borrowed satisfaction."
• Key Evidence and Findings: The Assessing Officer relied solely on the Investigation Wing's report without independent verification. Discrepancies, such as the incorrect amount of loans received, were noted.
• Application of Law to Facts: The tribunal emphasized that reopening should not be for "fishing and roving inquiries" and must be based on credible evidence, which was absent in this case.
• Treatment of Competing Arguments: The assessee argued that the reopening was based on suspicion, while the revenue relied on the Investigation Wing's report. The tribunal sided with the assessee, citing lack of independent verification by the Assessing Officer.
• Conclusions: The tribunal concluded that the reopening of assessments was invalid as it was based on borrowed satisfaction without tangible material.

Issue 2: Justification of Additions under Section 68

• Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act deals with unexplained cash credits. The assessee must prove the identity, creditworthiness, and genuineness of the transaction.
• Court's Interpretation and Reasoning: The tribunal found that the assessee provided sufficient evidence to prove the identity and creditworthiness of the creditors and the genuineness of the transactions.
• Key Evidence and Findings: The assessee submitted loan confirmations, financial statements, and evidence of repayment. The creditors were shown to have substantial net worth.
• Application of Law to Facts: The tribunal noted that the Assessing Officer failed to point out any defects in the evidence provided by the assessee and relied solely on the Investigation Wing's report.
• Treatment of Competing Arguments: The assessee argued that all necessary documents were provided, while the revenue maintained that the transactions were suspicious. The tribunal found in favor of the assessee due to lack of contrary evidence from the revenue.
• Conclusions: The tribunal held that the additions under Section 68 were not justified as the assessee successfully demonstrated the legitimacy of the transactions.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "Reopening of the assessment is not permitted for making fishing and roving enquiries." "The reasons to believe regarding the escapement of the income should be based on certain tangible material and it should not be mere pretence of the Assessing Officer."
• Core Principles Established: The tribunal reinforced that reopening of assessments must be based on credible evidence and not mere suspicion. Additionally, the burden shifts to the Assessing Officer to disprove the evidence provided by the assessee once the initial burden is discharged.
• Final Determinations on Each Issue: The tribunal determined that the reopening of assessments was invalid and the additions under Section 68 were unjustified, leading to the deletion of the impugned additions in all appeals.

In conclusion, the tribunal allowed all appeals, emphasizing the importance of credible evidence in reopening assessments and making additions under Section 68.