2024 (7) TMI 838 - AT - Income Tax

Validity of reopening of assessment - approval granted by competent authority not in accordance with the provisions of section 151 - Reason to believe - borrowed satisfaction or independent application of mind - addition of unexplained credit u/s 68 - AO had recorded such reasons with his conviction that the assessee had received certain amounts as commission, in the form of accommodation entries HELD THAT - On perusal of the bank statement of M/s Arion Commosales Pvt. Ltd. for the relevant period, from whom the assessee company had received the commission income, which was alleged by the revenue as receipts in the form of accommodation entry, however, it is observed that there was no receipt in the bank account of the M/s Arion Commosales Pvt Ltd. from M/s Evergrow Suppliers Pvt. Ltd. or M/s Gitanjali Book Depot. Thus, in view of such facts the reasons recorded by the Ld. AO are found to be without any basis, merely the repetition of information received from investigation wing, dehors any independent inquiry or application of mind, much less the claim of the Ld. AO that it has been noticed by the undersigned that huge chunk of cash was deposited in the bank account of M/s Gitanjali Book Depot was found to be a bald statement as the relevant information was not with him and further on perusal of the bank statement such conviction of the Ld. AO is found to be militating against the corroborative evidence. Since the Ld. AO was hunting for the evidence / information even after 09 months from the date of recording of the reasons, therefore, the reasons recorded can be construed as formation of belief under borrowed satisfaction and obviously without application of mind as the information which was to be looked into was not available with the Ld. AO. Further since the facts are found to be incorrect, which was the basis for reopening assessment, therefore, on that ground also the reopening assessment u/s 147 cannot sustained. AO had formed the reason to believe without application of mind to the material/information which was though claimed to be noticed but eventually was not available with him. Thus, the proceedings invoked u/s 147 by issuing the notice u/s 148 for reopening of the case of the assessee by merely referring to the information that was received by him from the investigation wing are found to be invalid in the eyes of law. AO had merely acted in a mechanical manner on the information that was received by him from the ADIT(Inv.), without applying his mind to the information/material which was supposed to be verified but the same was not available with him, therefore, AO had reopened the present case of the assessee on the basis of a borrowed satisfaction/ without application of mind - Assessee appeal allowed.

Summary

Issues Involved:
1. Validity of notice issued under section 148.
2. Assumption of jurisdiction under section 147.
3. Application of mind and independent inquiry by the Assessing Officer.
4. Borrowed satisfaction and mechanical application of mind.
5. Addition of unexplained cash credit under section 68.
6. Addition of bogus/inflated purchases under section 69C.
7. Non-supply of material used against the assessee.
8. Set-off of business loss/unabsorbed depreciation with unexplained cash credit and unexplained expenditure.

Detailed Analysis:

1. Validity of Notice Issued Under Section 148:
The assessee challenged the validity of the notice issued under section 148, particularly for Assessment Years 2011-12 and 2012-13, on the grounds that the approval granted by the competent authority was not in accordance with section 151. The approval was granted by both the PCIT and JCIT, whereas it should have been granted solely by the PCIT as required by section 151(1). The Tribunal found that the approval process did not comply with the statutory requirements, rendering the notice invalid.

2. Assumption of Jurisdiction Under Section 147:
The Tribunal examined whether the Assessing Officer (AO) had validly assumed jurisdiction to initiate proceedings under section 147. It was found that the AO acted on the basis of information received from the Investigation Wing without conducting an independent inquiry. The Tribunal held that the AO's action was based on borrowed satisfaction, which is not permissible under the law.

3. Application of Mind and Independent Inquiry by the Assessing Officer:
The Tribunal noted that the AO did not conduct any independent inquiry to verify the information received from the Investigation Wing. The AO's reasons to believe were merely a reproduction of the investigation report, lacking any independent application of mind. The Tribunal emphasized that the reopening of assessment requires the AO to apply his mind to the material before him and form an independent belief that income has escaped assessment.

4. Borrowed Satisfaction and Mechanical Application of Mind:
The Tribunal found that the AO acted mechanically on the information provided by the Investigation Wing without applying his own mind. The reasons recorded by the AO were based on borrowed satisfaction, which is not valid for reopening an assessment. The Tribunal cited various judicial precedents to support its conclusion that the AO must independently verify the information and form a belief that income has escaped assessment.

5. Addition of Unexplained Cash Credit Under Section 68:
The AO made an addition of Rs. 55,00,000 as unexplained cash credit under section 68, treating the commission income received by the assessee as accommodation entries. The Tribunal found that the AO did not conclusively prove the nexus between the cash deposited in the bank account of M/s Gitanjali Book Depot and the amounts received by the assessee. The Tribunal held that the addition was not justified as the AO's findings were based on incorrect facts and borrowed satisfaction.

6. Addition of Bogus/Inflated Purchases Under Section 69C:
The AO made an addition of Rs. 50,885 under section 69C for alleged bogus/inflated purchases from M/s Shiv Shakti Trading Co. The Tribunal found that the AO did not provide sufficient evidence to substantiate the claim of bogus purchases. The addition was based on assumptions and lacked concrete evidence. Therefore, the Tribunal held that the addition under section 69C was not justified.

7. Non-Supply of Material Used Against the Assessee:
The assessee argued that the AO did not provide the material used against him, such as the inquiry reports from the Investigation Wing, until the completion of the assessment. The Tribunal noted that the AO is duty-bound to provide all materials used against the assessee to ensure compliance with the principles of natural justice. The non-supply of material to the assessee was a violation of these principles.

8. Set-Off of Business Loss/Unabsorbed Depreciation with Unexplained Cash Credit and Unexplained Expenditure:
The assessee contended that the AO erred in not allowing the set-off of business loss/unabsorbed depreciation with the unexplained cash credit assessed under section 68 and unexplained expenditure assessed under section 69C. The Tribunal noted that the AO's reliance on outdated judicial precedents and failure to consider subsequent judgments that overruled earlier decisions led to an incorrect assessment. The Tribunal held that the set-off should be allowed as per the applicable legal provisions and judicial pronouncements.

Conclusion:
The Tribunal quashed the assessment orders for all the assessment years under consideration, holding that the AO had wrongly assumed jurisdiction under section 147 based on borrowed satisfaction and incorrect facts. The additions made under sections 68 and 69C were also found to be unjustified. The Tribunal allowed the appeals in favor of the assessee.

Order Pronounced:
The appeals under consideration (ITA No. 85 to 89/RPR/2024) were disposed of in favor of the assessee, with the Tribunal quashing the assessment orders and allowing the appeals. The order was pronounced in the open court on 12/07/2024.