2023 (5) TMI 1425 - AT - Income Tax

Reopening of assessment u/s 147 - addition of unexplained investment u/s 69 - as alleged reasons for reopening have not been recorded in a valid manner - HELD THAT - Roots of reassessment proceedings in the case of assessee are in the information received from Joint DIT (Investigation) Mumbai. It is not simpliciter on the information received from Investigation Wing that the AO re-opened assessment. Though the belief of the AO stemmed from information from Investigation Wing the AO further gathered information through AIR on another issue. After receipt of information the same was examined by the AO and thereafter he proceeded on to reopen the assessment. We find no infirmity in reopening of the assessment hence ground no. 1 of appeal is dismissed being devoid of any merit. Addition u/s 69 - Assessee has purchased flat from the funds having source outside India (Muscat) - The provisions of Article 24 of India-Oman DTAA are pari-materia to Article 22 of India-UAE DTAA that was examined in Rajeev Suresh Ghai 2021 (12) TMI 697 - ITAT MUMBAI case. As per the provisions of section 90(2) of the Act the assessee is entitled to benefit of treaty to the extent it is more beneficial to the assessee. Thus provisions of India-Oman DTAA the addition made u/s 69 of the Act is unsustainable and is thus liable to be deleted. We hold and direct accordingly.

Summary

ISSUES PRESENTED and CONSIDERED

The primary issues considered in this judgment are:

• Whether the reopening of assessment under Section 147 of the Income Tax Act, 1961, based on information from a third-party search, was valid.
• Whether the addition of unexplained investment under Section 69 of the Income Tax Act, 1961, was justified given the evidence and circumstances.

ISSUE-WISE DETAILED ANALYSIS

Reopening of Assessment under Section 147

The legal framework for reopening assessments under Section 147 requires the Assessing Officer (AO) to have reason to believe that income has escaped assessment. This belief must be based on tangible material and not merely on suspicion or conjecture.

The Court examined the reasons recorded by the AO for reopening the assessment, which were primarily based on information received from the Joint DIT (Investigation), Mumbai, regarding the payment of on-money by the assessee to Vipul Mangal. The AO further corroborated this information through additional inquiries.

The assessee contended that the reopening was based solely on third-party statements without proper application of mind. However, the Court found that the AO had conducted a preliminary inquiry and gathered information before deciding to reopen the assessment. Thus, the reopening was deemed valid, and the ground challenging it was dismissed.

Addition of Unexplained Investment under Section 69

Section 69 of the Income Tax Act allows for the addition of unexplained investments to the income of the assessee if the source of such investments is not satisfactorily explained.

The Court analyzed the evidence, including the statement of Vipul Mangal, which indicated receipt of on-money from the assessee. The assessee argued that the entire consideration for the property was paid through banking channels, and there was no substantive evidence of on-money payment apart from Mangal's statement.

The Court noted that the assessee was a non-resident with income sourced from Muscat, and the payment for the flat was made from these foreign funds. The Revenue failed to provide evidence of any taxable income in India used for the alleged on-money payment. The Court emphasized the importance of the source-based taxation principle, which requires a nexus between the income and its source in India.

Additionally, the Court considered the applicability of the India-Oman DTAA, which protects the assessee from taxation in India for income sourced outside India. The Court referenced a similar case, ITO vs. Rajeev Suresh Ghai, where the Tribunal held that unexplained investments sourced from outside India could not be taxed in India under the treaty provisions.

Based on these considerations, the Court concluded that the addition under Section 69 was unsustainable and directed its deletion.

SIGNIFICANT HOLDINGS

The Court established the following core principles:

• The reopening of assessment under Section 147 is valid if the AO has tangible material and conducts preliminary inquiries before forming a belief that income has escaped assessment.
• For non-residents, unexplained investments can only be taxed in India if there is a proven nexus between the investment and income sourced from India.
• The provisions of a Double Taxation Avoidance Agreement (DTAA) take precedence over domestic law if they are more beneficial to the assessee.

Final determinations on each issue:

• Reopening of assessment under Section 147 was upheld as valid.
• Addition of unexplained investment under Section 69 was deleted due to lack of evidence of income sourced from India and the protection offered by the India-Oman DTAA.