2024 (5) TMI 1560 - AT - Income Tax

Validity of reopening of assessment - assessee company was a beneficiary of certain bogus purchase bills - Mechanical application of mind by the A.O while recording the reasons to believe - HELD THAT - AO in the present case after considering the information that was shared with his office by the Dy. DIT(Inv.)-1 Raipur had duly analyzed the same and arrived at a bonafide belief that the income of the assessee company chargeable to tax had escapement therefore there is no substance in the contention of the AR that the A.O. had mechanically reopened its concluded assessment without independent application of mind and carrying out necessary verification on his part. Accordingly the order passed by the CIT(Appeals) to the said extent is set aside. AO had reopened the concluded assessment of the assessee company based on a mere change of opinion - A mere fresh application of mind by the AO to the same set of facts as were there in the course of the original assessment proceedings would not justify reopening of the concluded assessment based on a mere change of opinion . We are unable to fathom as to on what basis it is claimed by the Ld. AR that the reopening of the case of the assessee company is based on a mere change of opinion on the same set of facts as were available before the A.O. in the course of the original assessment proceedings. Also it would be relevant to point out that the letter wherein the AO was informed about receipt of share capital/premium by the assessee company from 7 investor companies was accompanied with supporting annexures which inter alia included a statement of one Shri Anjani Banka that was recorded by the Dy. DIT Unit-3 Kolkata wherein the aforesaid person had stated that he was a director of one of the share subscriber company viz. M/s. Banka Financial and Securities Pvt. Ltd. which was engaged in providing accommodation entries in lieu of commission. As the aforesaid information a/w. the supporting annexures were not available before the A.O. in the course of the original assessment proceedings that had culminated vide his order u/s. 143(3) of the Act dated 11.08.2014 therefore we are unable to concur with the CIT(Appeals) who had observed that the reopening of the concluded assessment of the assessee company was based on a mere change of opinion and thus had inter alia quashed the reassessment for want of valid assumption of jurisdiction by the A.O. We thus not being able to persuade ourselves to subscribe to the aforesaid observations of the CIT(Appeals) set-aside his order to the said extent. AO had reopened the case based on a reason to suspect - Neither the sufficiency of the material nor the quality of the belief arrived at by the A.O. can be called into question by the assessee at the stage of reopening of the case. Our aforesaid view is fortified by the judgment of Raymond Woollen Mills Ltd. 1997 (12) TMI 12 - SUPREME COURT We thus are unable to concur with the contention of the Ld. AR that reopening of the concluded assessment of the assessee company was prompted by a reason to suspect. As there was material before the A.O. to arrive at a bonafide belief that the income of the assessee company chargeable to tax had escaped assessment therefore we find no infirmity in the assumption of jurisdiction on his part for initiating the reassessment proceedings. Accordingly we are unable to accept the view taken by the CIT(Appeals) to the extent he had concurred with the assessee company that the A.O had reopened the concluded assessment based on a reason to suspect and thus had vacated the reassessment order on the said count. AO had traversed beyond the scope of his jurisdiction by reopening the concluded assessment of the assessee in violation of the 1st proviso to Section 147 of the Act - As in the case before the Hon ble Apex Court in Marico Limited 2020 (6) TMI 436 - SC ORDER the concluded assessment in the case of the present assessee company before us for the year under consideration i.e. A.Y 2012-13 had been reopened vide notice u/s 148 dated 30.03.2019 i.e. beyond 4 years from the end of the relevant assessment year without there being any failure on the part of the assessee company to fully and truly disclose all material facts necessary for its assessment therefore as observed by the CIT(Appeals) and rightly so the reopening of the concluded assessment of the assessee company would be hit by the 1st proviso to Sec. 147 of the Act. We thus concur with the view taken by the CIT(Appeals) that the original assessment of the assessee company for AY 2012-13 that was earlier framed under Sec. 143(3) dated 11.08.2014 de hors any failure on the part of the assessee company to fully and truly disclose all material facts necessary for its assessment could not have been reopened by the AO vide Notice u/s 148 dated 30.03.2019 i.e after the expiry of four years from the end of the relevant assessment year. AO in our considered view is obligated to arrive at a conclusion about the failure on the part of the assessee to disclose necessary facts for assessment after applying his mind and verification of the facts which we find he had failed to do in the present case. Accordingly we approve the view taken by the CIT(Appeals) wherein he had observed that the AO had exceeded his jurisdiction and reopened the concluded assessment of the assessee company in violation of the mandate of the 1st proviso to Section 147 i.e after the lapse of four years from the end of the relevant assessment year i.e A.Y 2012-13. AO had grossly erred in law and proceeded with and framed the assessment vide his order u/s. 143(3) r.w.s. 147 of the Act dated 31.12.2019 without passing an order rebutting the objections filed by the assessee company as regards the validity of the reassessment proceedings - As the A.O. in the present case before us had failed to dispose of the objections to the reopening of the case as were filed by the assessee company before him therefore the same is clearly in defiance of the law declared by the Hon ble Apex Court. In our view the statutory obligation cast upon the A.O to dispose of by way of a speaking order the objections of an assessee as regards the assumption of jurisdiction for the reopening of its case comes with a purpose i.e. in case objections are decided against the assessee then the latter may assail the same by filing a Writ Petition before the Hon ble High Court. Accordingly in case the A.O fails to dispose of the objections and proceed with and frames the assessment without satisfying the aforesaid mandate of law then the assessee would stand divested of the statutory right vested with him as per the aforesaid judgment in the case of GKN Driveshafts (India) Ltd. 2002 (11) TMI 7 - SUPREME COURT We thus respectfully following the aforesaid judicial pronouncements wherein the Hon ble High Courts had quashed the reassessment proceedings for the reason that the A.O had without disposing of the objections filed by the assessee to the reopening of its case had proceeded with and framed the assessment in defiance of the judgment of GKN Driveshafts (India) Ltd. 2002 (11) TMI 7 - SUPREME COURT concur with the view taken by the CIT(Appeals) who by adopting a similar reasoning had quashed the reassessment proceedings. Accordingly the order of the CIT(Appeals) is upheld in terms of our aforesaid observations. Ground of appeal No.1 raised by the revenue is partly allowed in terms of our aforesaid observations.

Summary

The core legal questions considered in this judgment revolve around the validity of the reassessment proceedings initiated under Section 147 read with Section 143(3) of the Income-tax Act, 1961. Specifically, the issues are:

1. Whether the Assessing Officer (A.O.) validly assumed jurisdiction to reopen the concluded assessment by recording a bona fide "reason to believe" that income chargeable to tax had escaped assessment, or whether the reopening was based on a mere "reason to suspect" or a mechanical application of mind relying on third-party reports without independent verification.

2. Whether the reassessment was based on a mere "change of opinion" by the A.O. on the same set of facts already considered during the original assessment, which is impermissible under law.

3. Whether the reopening of the assessment beyond the four-year period from the end of the relevant assessment year was valid, considering the requirements of the first proviso to Section 147 that necessitates failure on the part of the assessee to disclose fully and truly all material facts.

4. Whether the A.O. erred in proceeding with and framing the reassessment without disposing of the objections filed by the assessee against the reopening notice, thereby violating procedural requirements.

5. Whether the Commissioner of Income Tax (Appeals) was justified in quashing the reassessment order without adjudicating the merits of the addition made under Section 68 of the Act.

Issue-wise Detailed Analysis:

1. Validity of Jurisdiction for Reopening: Independent Application of Mind vs. Mechanical Adoption of Third-party Information

Legal Framework and Precedents: Section 147 of the Income-tax Act mandates that the A.O. must have a bona fide "reason to believe" that income chargeable to tax has escaped assessment to validly reopen a case. The Supreme Court and various High Courts have consistently held that "reason to believe" requires an independent application of mind by the A.O. and cannot be a mere "reason to suspect" or a borrowed satisfaction from third-party reports. Key precedents include decisions emphasizing that reopening based on mechanical acceptance of investigation reports without verifying the material or applying mind is invalid.

Court's Interpretation and Reasoning: The assessee contended that the A.O. reopened the case mechanically based on reports from the Dy. DIT (Inv.)-1, Raipur, without conducting any independent inquiry or verifying the information. The A.O. had relied heavily on the investigation wing's findings about bogus purchase bills and share capital raised from shell companies, without consulting the original assessment record or seeking clarifications from the assessee or the alleged investors.

The CIT(Appeals) concurred with the assessee, observing that the A.O. had not brought any new material or conducted independent verification before reopening. The reasons recorded were largely a reproduction of conclusions from the investigation report, constituting a "borrowed satisfaction" and lacking the requisite nexus between tangible material and formation of belief.

However, on appeal, the Tribunal examined the assessment record and found that the A.O. had received fresh information post the original assessment from the investigation wing, analyzed the material, and formed a bona fide belief. The Tribunal held that the sufficiency or correctness of the material is not to be tested at the reopening stage; what matters is the existence of some material on which the A.O. can form a bona fide belief. Accordingly, the Tribunal set aside the CIT(Appeals) order on this issue, holding that the A.O. had validly assumed jurisdiction.

Key Evidence and Findings: The letters dated 04.03.2019 and 19.03.2019 from Dy. DIT (Inv.)-1, Raipur, containing detailed information on bogus purchases and share capital from shell companies, constituted fresh material. The A.O. analyzed these documents and the financials of the investor companies to form his belief.

Application of Law to Facts: The Tribunal applied the principle that reopening requires only some material to form a bona fide belief, not conclusive proof. The A.O.'s analysis of fresh information satisfied this threshold.

Treatment of Competing Arguments: The assessee's argument of mechanical reliance was rejected as the Tribunal found evidence of independent application of mind by the A.O. The CIT(Appeals)'s contrary view was set aside.

Conclusion: The reopening was validly initiated with proper jurisdiction and independent application of mind by the A.O.

2. Reopening Based on Mere Change of Opinion

Legal Framework and Precedents: It is well established that reopening of assessment under Section 147 cannot be based on a mere change of opinion by the A.O. on the same facts already considered in the original assessment. The A.O. is not empowered to review his own order under the guise of reassessment. Landmark judgments have held that fresh application of mind to the same material does not justify reopening.

Court's Interpretation and Reasoning: The assessee argued that the original A.O. had accepted the genuineness of share capital and premium from the investor companies during the original assessment after due verification. The successor A.O. reopened the case and made additions on the same facts without any new material, amounting to impermissible change of opinion.

The CIT(Appeals) agreed, holding that the reopening was based on the same material already on record and no fresh information was brought on record to discredit the earlier acceptance. The Tribunal, however, distinguished this case by noting that the successor A.O. had received fresh information from the investigation wing after the original assessment was completed, including a statement implicating one of the investor companies in accommodation entries, which was not available earlier.

Key Evidence and Findings: The fresh information included statements and annexures received in 2019, post original assessment in 2014, which were not before the original A.O.

Application of Law to Facts: Since new material had come to light after the original assessment, the reopening was not a mere change of opinion but a valid exercise of jurisdiction based on fresh facts.

Treatment of Competing Arguments: The Tribunal rejected the assessee's claim of mere change of opinion, holding that fresh information distinguishes the present case from the precedents.

Conclusion: The reopening was not based on a mere change of opinion but on new material, thus valid.

3. Reopening Beyond Four Years and Applicability of the First Proviso to Section 147

Legal Framework and Precedents: The first proviso to Section 147 restricts reopening beyond four years from the end of the relevant assessment year unless the A.O. has reason to believe that income chargeable to tax has escaped due to failure by the assessee to disclose fully and truly all material facts necessary for assessment. The Supreme Court has held that mere failure to disclose "secondary facts" is not sufficient; the assessee must fail to disclose "primary facts".

Court's Interpretation and Reasoning: The original assessment was framed on 11.08.2014, and the reassessment notice was issued on 30.03.2019, beyond the four-year period. The assessee submitted that it had fully and truly disclosed all material facts, including detailed information about the share capital and premium received from the investor companies during the original assessment proceedings. The A.O. had accepted the genuineness of these transactions in the original assessment.

The CIT(Appeals) found that the reopening was invalid as the assessee had not failed to disclose any material facts and the A.O. had not demonstrated any such failure. The Tribunal concurred with the CIT(Appeals), holding that the reopening beyond four years without failure to disclose was beyond jurisdiction and void ab initio.

Key Evidence and Findings: The assessee had furnished detailed shareholder information, bank statements, audit reports, and computations during the original assessment. The A.O. had not raised any adverse findings at that stage.

Application of Law to Facts: Since no failure to disclose was established, the extended limitation period could not be invoked.

Treatment of Competing Arguments: The revenue's contention that fresh information justified reopening was rejected because the reopening was beyond four years without establishing failure to disclose.

Conclusion: The reopening beyond four years was invalid for lack of failure to disclose fully and truly all material facts.

4. Failure to Dispose of Objections Filed by the Assessee Against Reopening

Legal Framework and Precedents: The Supreme Court in GKN Driveshafts (India) Ltd. Vs. ITO has held that after reopening notice and reasons are furnished, the assessee is entitled to file objections, which the A.O. must dispose of by passing a speaking order before proceeding with assessment. Failure to do so renders the reassessment invalid.

Court's Interpretation and Reasoning: The assessee had filed detailed objections to the reopening on 16.06.2019 and reminded the A.O. on 25.09.2019. The A.O. proceeded to frame the reassessment without disposing of these objections. The CIT(Appeals) quashed the reassessment on this ground.

The Tribunal upheld the CIT(Appeals) order, relying on the binding precedent of GKN Driveshafts and subsequent High Court decisions, emphasizing the mandatory nature of disposing objections before assessment.

Key Evidence and Findings: The assessee produced an affidavit affirming that no order disposing objections was passed. The assessment record confirmed the absence of such disposal.

Application of Law to Facts: Non-disposal of objections violated statutory procedural safeguards.

Treatment of Competing Arguments: The revenue's defense was rejected as contrary to settled law.

Conclusion: The reassessment framed without disposing objections was invalid.

5. Merits of Addition Under Section 68

Since the reassessment proceedings were quashed on jurisdictional and procedural grounds, the CIT(Appeals) rightly refrained from adjudicating the merits of the addition of Rs. 25,27,60,000/- made under Section 68. The Tribunal upheld this approach.

Significant Holdings:

"The sufficiency or correctness of the material is not a thing to be considered at this stage. What is required for validly initiating proceedings u/s.147 of the Act is the availability of some material based on which the department could reopen the case."

"Reopening of assessment under section 147 merely because there is a change of opinion cannot be allowed."

"Where assessment had earlier been made under Section 143(3) of the Act, and action thereafter is sought to be taken for reopening after the expiry of four years, it would be necessary that the A.O. must have reason to believe that income has escaped due to failure on the part of the assessee to disclose fully and truly all material facts."

"The assessing officer is bound to dispose of objections to issuance of notice by passing a speaking order before proceeding with the assessment."

"The reopening of the concluded assessment beyond the period of four years without establishing failure to disclose fully and truly all material facts necessary for assessment is beyond jurisdiction and void ab initio."

"The A.O. cannot proceed mechanically to issue reopening notice merely relying upon erroneous information supplied by third parties without independent application of mind."

"The Tribunal cannot strike down the reopening of the case if there is prima facie some material on which the Department could reopen the case."

"The power under Section 147 cannot be used to review the order of assessment or to take advantage of the A.O.'s own failure to apply mind."

Final determinations:

• The reassessment proceedings initiated by the A.O. were validly initiated with independent application of mind based on fresh material received from the investigation wing.
• The reopening was not based on a mere change of opinion but on new information received post original assessment.
• The reopening beyond four years was invalid as the assessee had fully and truly disclosed all material facts necessary for assessment, and no failure was established.
• The A.O. failed to dispose of the objections filed by the assessee against the reopening, rendering the reassessment invalid.
• Accordingly, the reassessment order was quashed as null and void.
• The CIT(Appeals) was justified in not adjudicating the merits of the addition since the reassessment itself was invalidated on jurisdictional and procedural grounds.