2008 (6) TMI 311 - AT - Income Tax

Notice issued u/s 148 for protective addition - Addition made in block assessment - Search And Seizure - Undisclosed investment in the share capital - CIT(A) held that the reopening is not valid - HELD THAT - In the instant case, the assessment in the case of Shri G.P. Goyal was completed on July 31, 1997. Notice u/s 148 has been issued to the assessee-company on July 27, 1998. Once the Revenue has taken its stand that such investment in the share capital belong to Shri G.P. Goyal and the assessment order was passed, then it cannot be said that the AO was having reason to believe that income has escaped in the hands of the assessee-company. Reassessment cannot be made on mere suspicion. AO has to form a belief that income has escaped assessment in the hands of the assessee. Once it has been held that such investment belonged to Shri G.P. Goyal, then there was no further material to come to the conclusion that such escaped income belonged to the assessee. The basic requirement for reopening the assessment is that the AO should have reason to believe that the income has escaped assessment is not satisfied in this case. Hence, we are satisfied that the ld CIT(A) was justified in holding that the assessment cannot be reopened for making protective addition. The hon'ble apex court in the case of CIT v. Divine Leasing and Finance Ltd. 2007 (11) TMI 627 - SC ORDER held that if the AO treats share application money as undisclosed income u/s 68 and the Revenue believes that the shareholders are bogus, then the AO is free to reopen the assessment of the shareholders. The apex court held that the share application money cannot be added in the hands of the company. Therefore, it is held that the ld CIT(A) was justified in cancelling the assessment in the hands of the assessee. In the result, the appeal filed by the Revenue is dismissed.

Summary

Issues:
1. Validity of notices for reopening to make protective addition.
2. Concept of protective assessment under Chapter XIV-B.
3. Addition of unexplained credit towards share application.
4. Consideration of assessee's non-cooperation.
5. Applicability of Supreme Court decision in Stellar Investments case.

Analysis:

Issue 1:
The revenue appealed against the order of the CIT(A) regarding the validity of notices issued for reopening to make protective additions. The CIT(A) held that reopening for protective additions is impermissible unless clear findings of ascertainable income escape exist. The Tribunal concurred, emphasizing the necessity of a definite assessee for reopening.

Issue 2:
Regarding protective assessment under Chapter XIV-B, the CIT(A) and Tribunal noted that such assessments should only occur when income clearly escapes a specific assessee. The Apex Court's decision in Stellar Investments case was cited to support the position that share application money cannot be assessed in a company's hands.

Issue 3:
The addition of unexplained credit towards share application was contested. The Assessing Officer treated the investment as unexplained cash credit under section 68. However, the CIT(A) and Tribunal found the assessment invalid, emphasizing the need for clear evidence and proper procedures.

Issue 4:
The consideration of the assessee's non-cooperation in proving credit-worthiness was raised. The Assessing Officer's decision to treat the credits as unexplained investments due to non-cooperation was challenged. The Tribunal emphasized the importance of proper assessment based on evidence.

Issue 5:
The applicability of the Supreme Court's decision in the Stellar Investments case was debated. The CIT(A) and Tribunal found the decision relevant to the case, supporting their stance on the treatment of share application money and protective assessments.

The Tribunal analyzed the facts of the case, including the search action, investments, and assessments in the hands of individuals. The Tribunal highlighted the need for clarity in assessments, proper procedures, and adherence to legal principles. Ultimately, the appeal filed by the revenue was dismissed, upholding the CIT(A)'s decision to cancel the assessment in the company's hands. The judgment referenced relevant legal precedents and emphasized the importance of following due process in tax assessments.