2024 (7) TMI 1327 - AT - Income Tax

Validity of the reopening by AO u/s 147 - Addition u/s 68 - reasons recorded by AO need to be examined to see whether he had satisfied the conditions precedent necessary for doing so, as prescribed u/s 147 - HELD THAT - We find that the foundation on the basis of which the AO has formed the belief is itself incorrect, in other words the AO has reopened the assessment based on the wrong assumption of fact. We note that the assessee had already undergone scrutiny assessment u/s 143(3) wherein some addition was made in the assessment proceedings. And the assessee had duly disclosed in its return to have received share application by account payee cheques from M/s Suryadeep Salt Refinery Chemical Works Ltd and pursuant thereto, they were allotted shares of assessee as per the Companies Act and details of which were produced before the AO in the original assessment proceedings and accepted by him. In such a back drop, where the AO received adverse information from office of the CIT(A)-37, Mumbai vide letter he ought to have made preliminary enquiry and noted the correct facts in respect of the issue, rather than forming his belief of escapement of income on incorrect assumption of facts as noted which action of AO cannot be countenanced. In this context, it should be borne in mind that adverse information made trigger reason to suspect and not reason to believe which is necessary condition precedents for reopening the assessment. When the AO receives adverse information about the assessee he should carry a preliminary enquiry and collect material and thereafter, he should have recorded reasons to believe escapement of income, which exercise AO has not done in this case. Consequently, the notice issued by the AO u/s 148 is vitiated and held to be bad in law and quashed. Appeal filed by the assessee is allowed.

Summary

Issues:
Validity of reopening by AO under section 147 of the Income Tax Act, 1961.

Analysis:
The appeal was filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)/NFAC, Delhi for AY. 2005-06, challenging the validity of the reopening by the AO under section 147 of the Income Tax Act, 1961. The AO had issued a notice under section 148 of the Act dated 18.03.2010 and subsequently framed the assessment under section 144 of the Act on 10.12.2010, making an addition of Rs. 40 lakhs under section 68 of the Act. The key legal issue revolved around whether the AO had satisfied the conditions precedent necessary for reopening the assessment as prescribed under section 147 of the Act. The primary requirement under this provision is that the AO must record the "reasons to believe, escapement of income" before reopening an assessment. It is crucial for the reasons recorded to be self-explanatory and based on information that leads to a belief in income escapement. The distinction between "reason to suspect" and "reason to believe" is emphasized, with the latter being the requisite standard for reopening an assessment. The reasons recorded by the AO must stand on their own, without additions or deletions, and should provide a clear link between the conclusion and the evidence.

The reasons recorded by the AO on 18.03.2010 for reopening the assessment were based on information received from the office of the CIT(A)-37, Mumbai, alleging that the share transaction shown by the assessee in respect of a particular company was bogus. However, upon examination, it was revealed that the AO's belief was founded on incorrect assumptions of facts. The assessee had already undergone scrutiny assessment where the share application money received was duly disclosed and accepted by the AO. The AO failed to conduct a preliminary inquiry and collect accurate material before forming the belief of income escapement. The adverse information received should have triggered a "reason to suspect" rather than a "reason to believe," which was necessary for reopening the assessment. As a result, the notice issued by the AO under section 148 of the Act was deemed vitiated and quashed, rendering the reassessment order non-est in the eyes of the law. The appeal filed by the assessee was allowed, highlighting the importance of adhering to the legal requirements for reopening assessments to ensure procedural fairness and accuracy in tax proceedings.