2017 (3) TMI 675 - AT - Income Tax

Validity of reopening of assessment - no independent application of mind - information received from the Directorate of Income Tax - Held that - AO has not applied his mind so as to come to an independent conclusion that he has reason to believe that income has escaped during the year. In my view the reasons are vague and are not based on any tangible material as well as are not acceptable in the eyes of law. The AO has mechanically issued notice u/s. 148 of the I.T. Act, 1961 on the basis of information allegedly received by him from the Directorate of Income Tax (Inv.), New Delhi. See G&G Pharma India Limited vs. ITO 2015 (2) TMI 104 - ITAT DELHI - Decided in favour of assessee

Issues:
1. Validity of notice issued u/s. 148 of the Income Tax Act
2. Justification of addition made to the declared income from undisclosed sources
3. Compliance with statutory preconditions for initiation of proceedings u/s. 147

Issue 1: Validity of notice issued u/s. 148 of the Income Tax Act

The case involved an appeal against the order of the Ld. CIT(A) pertaining to the assessment year 2005-06. The AO initiated proceedings u/s. 147 of the I.T. Act based on information received from the Directorate of Income Tax regarding unaccounted money introduced by a company. The Assessee challenged the initiation of proceedings, arguing that the reasons recorded for reopening were vague and lacked tangible material. The Assessee contended that the AO mechanically issued the notice without independent application of mind. The ITAT, after reviewing the reasons recorded by the AO, concluded that the reopening was unjustified. Citing a previous decision by the Delhi High Court, the ITAT held that the AO failed to apply his mind to the materials, rendering the reopening invalid. Consequently, the reassessment proceedings were quashed in favor of the Assessee.

Issue 2: Justification of addition made to the declared income from undisclosed sources

The AO, based on the information received, assessed the income of the Assessee at a higher amount under section 147 of the I.T. Act. The Assessee contested this addition, arguing that it was unjustified and against the facts of the case. However, the Ld. CIT(A) upheld the addition made by the AO. The ITAT, while quashing the reassessment proceedings on other grounds, did not delve into the merits of the addition made to the income from undisclosed sources, deeming it academic in nature due to the primary issue of the validity of the notice u/s. 148.

Issue 3: Compliance with statutory preconditions for initiation of proceedings u/s. 147

The Assessee contended that the initiation of proceedings u/s. 147 was not in compliance with the statutory preconditions. The Assessee argued that the AO did not satisfy the necessary conditions for initiating proceedings and completing the assessment. The Assessee further claimed that the proceedings were initiated based on information received from the Directorate of Income Tax without independent application of mind by the AO. The ITAT, while quashing the reassessment proceedings, agreed with the Assessee's argument, emphasizing the need for the AO to apply his mind independently before issuing a notice u/s. 148. The ITAT decision was based on the precedent set by the Delhi High Court in a similar case, leading to the quashing of the reassessment proceedings in favor of the Assessee.

In conclusion, the ITAT Delhi, in the given judgment, primarily focused on the validity of the notice issued u/s. 148 of the Income Tax Act, quashing the reassessment proceedings due to the lack of proper application of mind by the AO. The other issues, including the addition made to the income from undisclosed sources, were considered academic in light of the primary issue. The judgment highlighted the importance of complying with statutory preconditions for initiating proceedings u/s. 147 and emphasized the need for independent assessment by the AO before issuing notices for reassessment.

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