2016 (6) TMI 136 - HC - Income Tax

Validity of reopening of assessment - accommodation entries - Held that - The reasons for the reopening of the assessment have been perused by the Court. Mr Manchanda tried to impress upon this Court that since Mr. Gupta was the Director of the Assessee company, he was responsible for the money earned by it as commission for providing accommodation entries and, therefore, it should be taken to be money earned by the Assessee company. The Court is unable to agree with the above submission. The statement made by Mr Gupta in response to question No.24 and the illustration given by him show that the commission was earned by Mr Gupta and not the Assessee. The addition of the commission amount, if at all, had to be made substantively in the hands of Mr Gupta and of the amount of investment in the hands of the beneficiaries of the accommodation entries. Consequently, the Court is of the view that the reasons to believe as recorded by the AO did not satisfy the requirement of Section 147 (1) of the Act as regards the formation of opinion that the income of the Assessee had escaped assessment. - Decided in favour of assessee

Summary

Issues:
1. Validity of reopening assessment under Section 147/148 for Assessment Year 2004-05.

Detailed Analysis:
The High Court examined the question of law framed regarding the justification of reopening the assessment under Section 147/148 for the Assessment Year 2004-05. The reasons for reopening the assessment were based on a survey conducted in the case of a Chartered Accountant, where it was revealed that the Director of the Assessee was involved in providing bogus accommodation entries. The Assessing Officer concluded that the income of the Assessee had escaped assessment due to these entries. The AO proceeded to add the amount of premium received on such investments as income to the Assessee, even though the statement regarding this was retracted by the Chartered Accountant. The Commissioner of Income Tax Appeal upheld this addition, leading to an appeal before the ITAT.

The ITAT, in its order, emphasized that there must be a substantive assessment before any protective assessment can be made. It was noted that in this case, the AO proceeded with a protective assessment without any substantive assessment, which was deemed impermissible based on precedents. The High Court, after considering the arguments presented, disagreed with the Revenue's submission that the commission earned should be attributed to the Assessee company. The Court found that the commission was earned by the Chartered Accountant and not the Assessee, and any addition should have been made in the hands of the Chartered Accountant and the beneficiaries of the accommodation entries. Consequently, the Court held that the reasons recorded by the AO did not meet the requirements of Section 147(1) of the Income Tax Act regarding the formation of opinion that the Assessee's income had escaped assessment.

In conclusion, the High Court answered the question framed in the negative, in favor of the Assessee and against the Revenue. The appeal was dismissed with no order as to costs.