2025 (2) TMI 229 - AT - Income Tax

Validity of reopening proceedings - unexplained cash credit u/s. 68 - eligibility of reasons to believe - as alleged borrowed satisfaction without establishing any tangible nexus between the information received and belief formed - HELD THAT - AO has not mentioned the name of the company through which the assessee has received the alleged sum but merely based on the information received from Investigation Wing about some individuals proprietary firms and Private Limited Companies where huge cash was deposited and immediately thereafter transferred to other bank accounts which in generally large with abnormal pattern and having no business rationale. AO had not made efforts to give that detail of the companies through which the assessee has received the alleged sum the nature of transaction whether such transaction has already been declared in the audited balance sheet filed by the assessee. There is also no proper reason to believe which could show that the income has escaped assessment. It is a clear case of borrowed satisfaction and the reopening is carried out without any tangible material in the possession of the AO. The case of the assessee has been opened after four years and there is no observation of the AO that the assessee had failed to disclose the relevant material information in its regular return of income. Assessee has filed the detail of the company through which it received the alleged Share Application money and the same has been returned on the same day for entering into another transaction. Detail of these transactions were filed by the assessee but no enquiry whatsoever has been carried out. As relying on South Yarra Holdings 2019 (3) TMI 582 - BOMBAY HIGH COURT re-assessment proceedings carried out in the instant case by the AO are without any tangible material and without independent application of mind even when all the details of the alleged transaction were duly explained by the assessee. Decided in favour of assessee.

ISSUES PRESENTED and CONSIDERED

The primary issues considered in this judgment are:

The legality of the reopening of assessment proceedings under Section 147 of the Income-tax Act, 1961, specifically whether the reopening was based on "borrowed satisfaction" without tangible material evidence.
The merits of the addition of Rs. 10 lakh as unexplained cash credit under Section 68 of the Act, considering the genuineness of the transaction involving the receipt and subsequent use of funds for purchasing equity shares.

ISSUE-WISE DETAILED ANALYSIS

1. Legality of Reopening Proceedings

Relevant Legal Framework and Precedents: The reopening of assessments is governed by Section 147 of the Income-tax Act, which requires the Assessing Officer (AO) to have "reason to believe" that income has escaped assessment. The decision references the precedent set by the Hon'ble Bombay High Court in South Yarra Holdings vs. ITO, emphasizing that reopening must be based on the AO's independent satisfaction, not merely on information provided by another authority.
Court's Interpretation and Reasoning: The Tribunal found that the AO's reasons for reopening were vague and based on generalized information from the Investigation Wing without specific details about the transactions or companies involved. The absence of independent verification by the AO led to the conclusion that the reopening was based on borrowed satisfaction.
Key Evidence and Findings: The AO failed to specify the company through which the alleged sum was received and did not verify whether the transaction was declared in the assessee's audited balance sheet. The Tribunal noted that the assessee had provided details of the transactions and the company involved, but no further inquiry was conducted by the AO.
Application of Law to Facts: The Tribunal applied the legal requirement of "reason to believe" and found it lacking in this case due to the absence of tangible material and independent analysis by the AO.
Treatment of Competing Arguments: The Tribunal considered the arguments from both the assessee and the Departmental Representative, ultimately siding with the assessee due to the procedural deficiencies in the reopening process.
Conclusions: The Tribunal held that the reopening of the assessment was illegal and bad in law, leading to the quashing of the reassessment proceedings.

2. Merits of the Addition under Section 68

Relevant Legal Framework and Precedents: Section 68 of the Income-tax Act deals with unexplained cash credits, requiring the assessee to satisfactorily explain the nature and source of any sum credited in their books.
Court's Interpretation and Reasoning: Since the legal issue of reopening was decided in favor of the assessee, the Tribunal deemed the merits of the addition under Section 68 as academic and did not proceed with a detailed analysis.
Key Evidence and Findings: The assessee claimed that the funds were received and returned on the same day for purchasing equity shares, with supporting evidence provided. However, the Tribunal did not address this evidence substantively, as the reassessment proceedings were already quashed.
Application of Law to Facts: The Tribunal did not apply Section 68 to the facts due to the procedural invalidity of the reassessment.
Treatment of Competing Arguments: The Tribunal acknowledged the assessee's arguments regarding the genuineness of the transaction but did not evaluate them in detail due to the prior resolution of the legal issue.
Conclusions: No addition survived due to the quashing of the reassessment proceedings, rendering the merits of the case academic.

SIGNIFICANT HOLDINGS

Core Principles Established: The judgment reinforces the principle that reopening assessments must be based on the AO's independent satisfaction with tangible material evidence, not merely on information from another authority.
Final Determinations on Each Issue: The Tribunal quashed the reassessment proceedings as illegal and bad in law, leading to the allowance of the assessee's appeal. The merits of the addition under Section 68 were not addressed substantively due to the procedural resolution.

The appeal of the assessee was allowed, with the reassessment proceedings being deemed invalid and quashed.

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