2025 (3) TMI 348 - AT - Income Tax

Validity of reopening of assessment u/s 147 - Reasons to believe - unexplained cash credit u/s 68 - Borrowed satisfaction v/s independent application of mind - assessment has been reopened after four years HELD THAT - As relying on case of M/s Shankar Logistics (P) Ltd 2024 (7) TMI 582 - ITAT KOLKATA and taking into consideration the facts of the instant case we are of the considered view that the reopening proceedings in the case of the assessee has been carried out on poor reasons that too based on borrowed satisfaction and clearly there is no application of mind by the AO who was duty bound to first carry out an enquiry by way of examining Income Tax Return of the assessee company as well as M/s Frankdeal Traders Pvt. Ltd. of the present year and past years and then to look at the information provided in the audited balance sheet and then if any material fact which was necessary for the assessment or such material fact which gives rise to prove that there is escapement of income and that the assessee has failed to disclose fully and truly all material facts necessary for the assessment then he/she could have formed reasons to believe for issuing notice to reopen the assessment beyond four years. Also the facts remain undisputed that the AO has alleging that the assessee company have received accommodation entry during F.Y 2010-11 is totally wrong and misleading because the AO has himself observed in the assessment order that the alleged accommodation entry was actually received by M/s Frankdeal Traders Pvt. Ltd. upto F.Y 2008-09. Both these facts indicate that there is a complete contradiction of information mentioned by the Assessing Officer in the reasons recorded. Therefore the reasons recorded are merely on borrowed satisfaction and reasons to suspect and therefore we fail to find any infirmity in the detailed findings of the ld. CIT(A) quashing the reassessment proceedings on holding this to be illegal and bad in law. All the grounds raised by the Revenue are hereby dismissed.

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

Whether the reopening of the assessment proceedings under Section 147/148 of the Income-tax Act, 1961, was valid, particularly given that it was initiated beyond four years from the end of the relevant assessment year.
Whether the Assessing Officer's action was based on "borrowed satisfaction" from the Investigation Wing, rather than an independent application of mind.
Whether the approval for reopening given under Section 151 of the Act was mechanical and lacked proper satisfaction.
Whether the additions made under Section 68 of the Act, treating certain transactions as unexplained cash credits, were justified.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Reopening under Section 147/148

Relevant Legal Framework and Precedents: The reopening of an assessment under Section 147 requires the Assessing Officer to have "reason to believe" that income has escaped assessment. This belief must be based on tangible material and cannot be a mere suspicion. The first proviso to Section 147 stipulates that if four years have passed since the end of the relevant assessment year, reopening can only occur if there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment.
Court's Interpretation and Reasoning: The Tribunal found that the Assessing Officer's reasons for reopening were based on information from the Investigation Wing without any independent verification or enquiry. The reasons recorded were deemed to be based on "borrowed satisfaction" and not the Assessing Officer's own belief.
Key Evidence and Findings: The Tribunal noted that the Assessing Officer relied solely on information alleging accommodation entries without conducting any independent enquiry. It was also observed that the alleged accommodation entry of Rs. 20.13 crore was factually incorrect as it pertained to a period before the merger of the companies involved.
Application of Law to Facts: The Tribunal applied the legal requirement that the Assessing Officer must independently verify information before forming a belief of income escapement. The failure to do so rendered the reopening invalid.
Treatment of Competing Arguments: The Tribunal dismissed the Revenue's argument that the reopening was justified based on the information from the Investigation Wing, emphasizing the need for independent application of mind by the Assessing Officer.
Conclusions: The Tribunal concluded that the reopening was invalid as it was based on borrowed satisfaction and lacked the necessary independent enquiry and application of mind.

Mechanical Approval under Section 151

Relevant Legal Framework and Precedents: Section 151 requires that the Principal Chief Commissioner or Commissioner must be satisfied with the reasons recorded by the Assessing Officer for reopening an assessment. This satisfaction must be genuine and not merely a formality.
Court's Interpretation and Reasoning: The Tribunal found that the approval given by the Principal Commissioner was mechanical, as evidenced by the use of a rubber stamp with the words "Yes, I am satisfied" without any recorded reasoning.
Key Evidence and Findings: The Tribunal highlighted the lack of independent reasoning or satisfaction recorded by the Principal Commissioner, indicating a mechanical approval process.
Application of Law to Facts: The Tribunal applied the legal requirement that the approving authority must independently assess and satisfy themselves of the reasons for reopening, which was not done in this case.
Treatment of Competing Arguments: The Tribunal rejected the Revenue's assertion that the approval was valid, emphasizing the need for a substantive and independent satisfaction by the approving authority.
Conclusions: The Tribunal concluded that the approval was mechanical and invalidated the reopening of the assessment.

Additions under Section 68

Relevant Legal Framework and Precedents: Section 68 allows the addition of unexplained cash credits to the income of an assessee. The burden of proof lies on the assessee to explain the nature and source of such credits.
Court's Interpretation and Reasoning: The Tribunal did not delve deeply into the merits of the additions under Section 68, as the reassessment proceedings themselves were quashed on legal grounds.
Key Evidence and Findings: The Tribunal noted that the Assessing Officer's basis for the additions was flawed due to the incorrect assumption of accommodation entries, which were not substantiated by independent enquiry.
Application of Law to Facts: Since the reassessment was invalidated, the Tribunal did not address the application of Section 68 to the specific transactions.
Treatment of Competing Arguments: The Tribunal's decision to quash the reassessment meant that the merits of the Section 68 additions were not considered.
Conclusions: The Tribunal did not make a determination on the Section 68 additions due to the invalidity of the reassessment proceedings.

3. SIGNIFICANT HOLDINGS

The Tribunal emphasized the necessity for the Assessing Officer to independently verify information before forming a belief of income escapement, rejecting the notion of "borrowed satisfaction."
The Tribunal held that mechanical approval under Section 151 is insufficient, requiring explicit and reasoned satisfaction by the approving authority.
The Tribunal quashed the reassessment proceedings as illegal and bad in law due to the lack of independent enquiry and mechanical approval.
The Tribunal's decision underscores the importance of adhering to procedural requirements and ensuring genuine application of mind in reopening assessments.

← Previous Next →