2016 (6) TMI 214 - AT - Income Tax

Validity of the reassessment proceedings u/s 147 - unaccounted loan received - Held that - AO in the reasons recorded mentioned that it had come to his knowledge that the persons from whom amount was received were entry operator and provided the entries to the assessee after receiving the amount in cash however nothing was brought on record that how and in what manner the persons from whom the assessee received the loans were entry operator and that as to how the cash was paid by the assessee. In fact the aforesaid conclusion of the A.O. is unhelpful in understanding as to whether the AO applied his mind to the material particularly when he did not describe how and what manner it came to his knowledge that the assessee receive the accommodation entries. We therefore by keeping in view the ratio laid down in Principal Commissioner of Income-tax vs. G & G Pharma India Ltd. 2015 (10) TMI 754 - DELHI HIGH COURT are of the view that the reopening done by the AO u/s 147 of the Act was not valid and accordingly the subsequent assessment framed by the AO was void-ab-initio and therefore the same is quashed. - Decided in favour of assessee

Summary

Issues:
1. Validity of reassessment proceedings under section 147 of the Income Tax Act, 1961.
2. Justification of addition under section 68 as unexplained credit.
3. Challenge to the re-opening of assessment by the Assessing Officer (AO).
4. Application of mind by the AO in re-opening the assessment.
5. Compliance with legal requirements in the reassessment process.

Issue 1: Validity of reassessment proceedings under section 147 of the Income Tax Act, 1961:
The appeal questioned the validity of the reassessment proceedings initiated by the AO under section 147 of the Income Tax Act. The AO reopened the assessment based on specific information received from the Investigation Wing, suspecting that the assessee received amounts from entry operators. The CIT(A) upheld the AO's action, stating that the AO had sufficient reason to believe that income had escaped assessment. However, the tribunal found that the AO's reasons for reopening the assessment lacked a proper application of mind. The tribunal referred to a similar case where the High Court ruled that the AO must apply his mind to the materials before concluding that income escaped assessment. As the AO failed to demonstrate a prima facie opinion based on relevant material, the tribunal held the reassessment invalid and quashed the subsequent assessment.

Issue 2: Justification of addition under section 68 as unexplained credit:
The CIT(A) upheld the addition of ?11,00,000 under section 68 as unexplained credit, related to loans taken from specific parties. The assessee challenged this addition, arguing that the AO did not apply his own mind and relied on information from other sources without proving the loans were from entry operators. The tribunal noted that the assessee repaid the loans in the same year, and the genuineness of the loans was not questioned during the original assessment under section 143(3). Citing a High Court case, the tribunal emphasized the importance of the AO applying his mind to the material before concluding on unaccounted income. As the AO's reasoning lacked clarity and failed to establish the loans were from entry operators, the tribunal allowed the appeal and quashed the reassessment.

Issue 3: Challenge to the re-opening of assessment by the Assessing Officer (AO):
The assessee contested the validity of the re-opening of the assessment by the AO under section 148 of the Income Tax Act. The CIT(A) supported the AO's decision, stating that the AO had sufficient reason to believe income had escaped assessment. However, the tribunal found that the AO's reasons lacked a proper foundation and did not demonstrate a clear application of mind. The tribunal referred to a High Court ruling emphasizing the necessity for the AO to establish a prima facie opinion based on relevant material before re-opening an assessment. As the AO failed to meet this requirement, the tribunal deemed the reassessment invalid and quashed the subsequent assessment.

Issue 4: Application of mind by the AO in re-opening the assessment:
The tribunal scrutinized the reasons recorded by the AO for re-opening the assessment. It noted that the AO based the re-opening on information from other sources, claiming that the assessee received amounts from entry operators. However, the tribunal found a lack of evidence proving the loans were from entry operators, especially since the assessee repaid the loans in the same year. Citing a High Court case, the tribunal stressed the necessity for the AO to apply his mind to the material before concluding on unaccounted income. As the AO failed to establish a clear link between the loans and entry operators, the tribunal deemed the reassessment invalid and quashed the subsequent assessment.

Issue 5: Compliance with legal requirements in the reassessment process:
The tribunal emphasized the importance of the AO complying with legal requirements when re-opening an assessment. It highlighted the necessity for the AO to establish a valid reason to believe income had escaped assessment based on relevant material. In this case, the tribunal found that the AO's reasons lacked a proper foundation and failed to demonstrate a clear application of mind. Referring to a High Court ruling, the tribunal reiterated that the AO must apply his mind to the material before concluding on unaccounted income. As the AO did not meet these legal requirements, the tribunal deemed the reassessment invalid and quashed the subsequent assessment.