2016 (9) TMI 293 - AT - Income Tax

Reopening of assessment - information supplied by Investigation Wing - Held that - AO has merely acted in mechanical manner on receipt of the report from the Investigation Wing that he has reason to believe that income of ₹ 54,00,000/- has escaped assessment for the assessment year 2002-03 due to failure on the part of the assessee to disclose fully or truly all material facts necessary for assessment. AO has not even satisfied himself to prima facie make out that income of ₹ 54,00,000/- has escaped assessment in the year under assessment by pursuing record. AO has been provided with copies of share application forms containing names, addresses, PAN, bank details and confirmation of the investors, he was required to conduct the independent investigation to satisfy himself that such and such income has escaped assessment before assuming jurisdiction u/s 147 of the Act. Even on merits when the assessee had provided copies of share application forms containing names, addresses, PAN, bank details and confirmation of the investors, the onus stood shifted to the AO to prove that these are the shell companies and not to fasten the liability of the assessee on the ground that assessee has failed to produce the aforesaid six investor companies, moreso assessee cannot be called upon to prove negative. Thus forming an opinion merely on the basis of information supplied by Investigation Wing of the revenue that such and such company has provided an accommodation entries to the assessee to the tune of ₹ 54,00,000/- does not amount to the satisfaction of the AO in any manner whatsoever to reopen the case u/s 147 of the Act; - Decided in favour of assessee

Issues Involved:
1. Validity of reopening assessment under Section 147/148 of the Income Tax Act.
2. Deletion of addition of ?54,00,000 made under Section 68 of the Income Tax Act.
3. Onus to establish the identity and creditworthiness of shareholders and genuineness of transactions.
4. Reliance on the decision in the case of Lovely Exports (P) Ltd.
5. Jurisdictional error and application of mind by the Assessing Officer (AO).

Detailed Analysis:

1. Validity of Reopening Assessment under Section 147/148 of the Income Tax Act:
The primary issue was whether the AO was empowered to initiate proceedings under Section 147/148 based solely on a report from the Investigation Wing without independent application of mind. The Tribunal referred to the Supreme Court's judgment in Chhugamal Rajpal vs. S.P. Chaliha, which emphasized that the AO must have reasons to believe that income has escaped assessment, based on material evidence, and not merely on vague information. The Tribunal found that the AO acted mechanically on the Investigation Wing's report without satisfying himself that ?54,00,000 had indeed escaped assessment. This failure to apply an independent mind rendered the reopening of the assessment invalid.

2. Deletion of Addition of ?54,00,000 Made under Section 68 of the Income Tax Act:
The AO had added ?54,00,000 to the assessee's income under Section 68, alleging that it was unexplained share application money. However, the CIT (A) deleted this addition. The Tribunal upheld this deletion, noting that the assessee had provided necessary documents, including share application forms, PAN details, and bank confirmations, shifting the onus to the AO to disprove these documents. The AO's failure to conduct further independent investigations meant that the addition could not be sustained.

3. Onus to Establish the Identity and Creditworthiness of Shareholders and Genuineness of Transactions:
The AO contended that the assessee failed to produce directors or authorized representatives of the shareholder companies, thus failing to establish their identity and creditworthiness. The Tribunal, however, held that once the assessee provided detailed documentation, the burden shifted to the AO to prove these were shell companies. The assessee cannot be expected to prove a negative, i.e., that the transactions were not genuine.

4. Reliance on the Decision in the Case of Lovely Exports (P) Ltd.:
The AO argued that the CIT (A) erred in relying on the Lovely Exports (P) Ltd. case, where the AO did not ask the assessee to produce investor shareholders. In contrast, in the present case, the assessee was asked but failed to produce them. The Tribunal noted that the principle from Lovely Exports still applied: the AO must conduct independent verification once initial documentation is provided by the assessee.

5. Jurisdictional Error and Application of Mind by the Assessing Officer (AO):
The Tribunal emphasized that the AO must independently verify the information received from the Investigation Wing before initiating proceedings under Section 147. The AO's failure to do so in this case constituted a jurisdictional error. The Tribunal cited the Delhi High Court's decision in G & G Pharma India Ltd., which reiterated the need for the AO to apply his mind to the material before forming a belief that income had escaped assessment.

Conclusion:
The Tribunal concluded that the AO's initiation of proceedings under Section 147/148 was invalid due to lack of independent application of mind. Consequently, the assessment order under Section 143(3)/147 was quashed. The appeal filed by the revenue was dismissed, and the cross objections by the assessee were allowed.

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